The Financial Stability Board (FSB) has called for global regulators to consider placing direct limits on hedge fund leverage and size, as part of sweeping recommendations aimed at strengthening oversight of the fast-growing non-bank financial sector, according to a report by Reuters.

In a report published Wednesday, the FSB – an international body representing the world’s leading financial regulators – warned that hedge funds and other non-bank financial institutions (NBFIs) pose increasing risks to global market stability due to their lack of transparency and growing influence. In 2022, the sector accounted for $218tn, or nearly half of all global financial assets.

The FSB cited several recent flashpoints – including hedge funds’ rapid unwinding of $90bn in basis trades during the 2020 US Treasury market turmoil, the collapse of Archegos Capital in 2021, and the UK pension liability-driven investment crisis in 2022 – as evidence that leverage and concentration risks in the NBFI sector can threaten broader financial stability.

Bank of England Governor Andrew Bailey, who chairs the FSB, warned that crowded and leveraged positions held by hedge funds in government bond markets amplify shocks and create liquidity strains, with the potential for market disruptions to cascade across jurisdictions.

The FSB’s proposals include the introduction of leverage caps in core financial markets, tighter margin requirements in derivatives markets, enhanced position reporting, and tools to reduce firm-level concentration. The group also stressed the importance of improving global regulatory coordination and data sharing to better monitor systemic risks in the NBFI sector.

Hedge fund trade groups, the Association of Alternative Management Association (AIMA), and the Managed Funds Association (MFA), have pushed back against some of the proposals — warning that blunt regulatory tools could stifle economic growth and market efficiency.

In a statement, Jack Inglis CEO of AIMA, said: “Many of the recommendations in today’s FSB report are already in place across jurisdictions that host the largest alternative investment managers. The real challenge is that the current data framework often obscures more than it reveals.

"Reforming how data is collected from non-banks—and combining that with information already held by banks—needs to come first. Only then can regulators assess whether any additional policies are needed to manage leverage-related risks.”