The world's most senior financial stability watchdog is urging financial policymakers across global government departments to conduct a more profound and precise examination of leveraged bond bets on government debt, which amount to trillions of dollars and are perennially favored by hedge funds and other large institutional investors, with basis trades being a prime example. The Financial Stability Board (FSB) is calling for enhanced oversight of the specific risks borne by market participants in repurchase agreements (repos) collateralized by government bonds. In a research report published on Wednesday, the FSB identified and outlined several "vulnerability indicators" that regulatory authorities can track "to strengthen their monitoring capabilities." In recent years, hedge funds have increased their cash borrowing within the repo market. The FSB estimates this scale to be $3 trillion—approximately 25% of their cumulative assets. This expansion has occurred as leveraged hedge funds flock to high-profit strategies such as cash-futures basis trading; a strategy that employs leverage to capture minute value discrepancies between a bond and its corresponding futures contract. The latest FSB report stated, "Given the importance of repo markets to the global financial system, it is critical to ensure that their functioning is maintained, especially in periods of stress." The report further emphasized, "The build-up of leverage across market participants remains an area meriting further attention." This recommendation represents the latest effort by regulators to proactively address potential market blow-up risks associated with leveraged operations in the global bond market. The repo market is utilized by various types of asset management institutions and large commercial banks, essentially for borrowing by exchanging bonds for cash assets, or vice versa. The FSB study pointed out that central banks and fiscal authorities need to scrutinize more closely the vulnerabilities and leverage risks in the government bond-collateralized repo market, with basis trading in the U.S. Treasury market being one of the most typical, profitable, and closely watched high-leverage strategies; within this sphere, the overall estimated scale of hedge funds' "cash borrowing/leveraged financing" in the repo market reaches a substantial $3 trillion, accounting for about 25% of their assets. What exactly constitutes the leveraged bond trades referenced by the FSB? The report stated that in U.S. financial markets, bond dealers list "on-the-run vs. off-the-run arbitrage, yield curve or duration trades, and cash-futures basis trading" as the most popular strategies among their hedge fund clients. In the eurozone, yield curve or duration trades dominate, while cash-futures basis trading is also "prevalent." A core concern for the world's top financial stability regulator is that leveraged investors facing sharp short-term liquidity needs might be forced to sell larger volumes of assets to raise funds. The report said that if such asset sales occur against a backdrop of existing market liquidity stress, they could "amplify market volatility and lead to adverse feedback loops." The "leveraged bond trades" cited by the FSB do not refer broadly to simply "buying bonds with some leverage," but rather to a suite of strategies involving large positions built using government bonds as collateral and short-term financing like repos—typically executed by hedge funds. The FSB's specific focus is on: market participants accumulating leverage in the government bond-backed repo market, relying on short-term funding, which could force deleveraging and asset sales that amplify volatility if faced with margin hikes, funding tightening, or market turbulence; in other words, an unexpected large-scale deleveraging could exacerbate volatility and even create a feedback loop. These leveraged bond trades prominently include basis trading, and basis trading is indeed one of the "representative strategies" the FSB highlights. The classic structure of so-called "cash-futures basis trading" is: taking a long position in the cash bond; taking a short position in the corresponding Treasury futures contract; and using repo borrowing to finance the cash bond position and amplify leverage, thereby profiting en masse from the small price difference (the basis) between the cash bond and the futures through leverage. Federal Reserve research directly defines U.S. Treasury basis trading as a high-leverage arbitrage involving "short-term repo financing + long cash position + short futures position," and notes its vulnerability stems from dual shocks: changes in futures margins and changes in repo funding spreads/availability. This FSB study similarly mentions the significant rise in hedge funds' cash borrowing in the repo market and lists basis trading as one of their popular, leverage-dependent strategies. Minimum Haircut Scenario Both the FSB and the Bank of England have previously proposed the concept of minimum haircuts, meaning mandatory valuation discounts applied to collateral exchanged in repo transactions. This would limit the scale of leverage that can be accumulated in the repo market. Hedge funds and the traditional asset management industry strongly oppose such proposals, arguing they would harm liquidity. Jillien Flores, Chief Advocacy Officer at the Managed Funds Association, stated on Wednesday local time, "By not implementing blunt and harmful constraints, such as prescribed minimum haircut benchmarks, and ensuring these markets have deep, reliable liquidity support, it will help keep borrowing costs low for taxpayers." "In my view, alternative asset managers are significant participants in global sovereign debt markets." The FSB committee, chaired by Bank of England Governor Andrew Bailey, who also steers its reform direction, recommended that global central bank officials need to closely monitor multiple indicators related to market activity, structure, trading resilience, and intermediation capacity. The report encourages further work to overcome numerous data challenges—challenges that make it difficult for some member jurisdictions (including major global central banks, financial regulators, and national finance ministries) to accurately monitor risks. The FSB research report also stated that monetary policy authorities and fiscal authorities should review the specific information disclosure practices between "leveraged non-bank institutions and leverage providers." Where such practices are inadequate, "it is recommended to consider establishing public-private partnerships with the industry to develop standards and/or regulatory guidance."