CFTC Chairman Timothy Massad on measuring hedge fund leverage

Keynote Remarks of Chairman Timothy Massad at the Managed Funds Association Outlook 2016 Conference
October 21, 2016
FSOC Asset Management Project
Finally, I would also like to say a few words about the asset management project of the Financial Stability Oversight Council, or FSOC, as I know it is of interest to you. The Council is made of a very diverse group of financial agencies, whose experience in dealing with collective investment vehicles varies. The staffs of the various FSOC agencies have engaged in a great deal of information sharing and discussion to formulate a common approach.
After the initial FSOC report on asset management products and activities, our focus in the short-term has been on examining the role of leverage by hedge funds. Now, as I said at the time, one of my key concerns was simply how we define leverage and the metrics we use to measure it. To analyze the implications of leverage, we need to take into consideration a variety of factors that affect risk, from product type and offsetting positions to whether a transaction is cleared and whether margin is collected. We must look at other critical market structure details as well.
So it’s important that this be data driven. We can bring the data the CFTC holds for the futures markets, as well as the data now collected on the swaps markets, to bear on the issue, particularly on the cleared swaps market. This data has added greatly to the “Form PF” data collected by the SEC. It enables us to look at what proportion of the transactions of the largest hedge funds are cleared versus uncleared, a very important distinction. It enables us to look at whether the uncleared transactions are “exotic” in some way, or plain vanilla transactions that aren’t cleared for some reason. This effort has been very useful in understanding where the data gaps are and developing a more precise analytical approach as we look at these issues further.

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