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The Financial Stability Board's (FSB) latest consultation on leverage in non-bank financial intermediation (NBFI) misallocates its focus by relying on a limited set of examples that appear shaped by preconceived narratives rather than comprehensive factual analysis.

The FSB continues to single out leverage and hedge funds as potential sources of financial instability using selective and flawed examples, including:

• March 2020 US Treasury sell-off: Hedge funds were not the primary drivers of market stress. Other non-leveraged market participants were larger sellers, both in absolute dollar terms and as a percentage of holdings-undermining the narrative that high leverage was either the cause or key amplifying factor in this stress event.
• Archegos mischaracterisation: The Archegos family office collapse is being misappropriated to justify broader scrutiny of hedge funds with claims that leverage might be "hidden" to their counterparties. Yet Credit Suisse, the bank most affected, clarified in its commissioned report on its failings that Archegos' problems did not stem from the bank's lack of understanding of its risk exposure, but rather from inadequate risk management of such exposure.

The handful of examples coupled with theoretical hypothesising about various ways in which leverage might affect the functioning of the financial system has led the FSB to propose a large set of potentially disruptive regulatory interventions without much detailed explanation of how they might be justified in relation to the actual risks posed or calibrated to avoid serious market and liquidity disruptions.

Commenting on AIMA's response, Ji™ Krl, Deputy CEO and Global Head of Government Affairs of AIMA, said: "Hedge funds have a proven ability to manage leverage and risk, delivering strong returns-especially in market downturns. The Bank of England's recent stress test confirmed that leveraged funds generated far less liquidity demand than unleveraged ones when subject to modelled shocks, debunking the idea that leverage inherently adds risk. Yet, nearly two decades after the financial crisis and despite extensive regulation, policymakers continue to push scattered proposals instead of refining existing rules."

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