The US Federal Reserve and Bank of England are examining global banks’ exposure to large trading firms following market turmoil that reportedly contributed to a $15 billion loss at Jane Street, putting leverage and counterparty risk back under regulatory scrutiny.
The Financial Times reported that the two central banks have requested information from financial institutions about their relationships with major trading firms, including how those exposures changed during periods of extreme market volatility. Reuters said it had not independently verified the FT report when it published its account.
Regulators are reportedly examining areas including risk appetite, intraday exposure and how banks’ risk controls functioned as markets moved sharply.
The scrutiny follows turmoil involving Situational Awareness, an AI-focused investment fund run by former OpenAI researcher Leopold Aschenbrenner.
The fund was forced to sell most of its public-equities portfolio to Citadel Securities after a sharp decline in AI and semiconductor stocks triggered pressure on its positions.
Leverage Returns to Regulatory Spotlight
The episode raises a familiar question for financial regulators: how risks outside conventional banks can migrate back into the banking system.
Hedge funds and proprietary trading companies can borrow from multiple banks to increase the size of their positions.
This leverage can amplify profits when markets move favourably.
But it can also magnify losses.
When heavily leveraged positions deteriorate quickly, lenders can demand additional collateral through margin calls.
If an investment firm cannot provide sufficient collateral, it may be forced to sell assets rapidly.
Those sales can push prices down further, potentially creating losses for other investors and financial institutions.
SEC Had Already Begun Examining Episode
The latest scrutiny follows an earlier intervention by the US Securities and Exchange Commission.
According to Reuters, the SEC subpoenaed several Wall Street banks last month as part of an examination of Situational Awareness’ trading activities and use of leverage.
The institutions named in that reporting included Goldman Sachs, JPMorgan, Citigroup and Bank of America.
The episode has drawn additional attention because of the scale of investment currently flowing into artificial intelligence.
AI-related shares have experienced extraordinary gains but also periods of intense volatility as investors debate valuations and the likely returns from hundreds of billions of dollars being invested in computing infrastructure.
Regulators will now be interested in determining whether leverage within trading firms could amplify future market shocks.
For global banks, the issue is not simply whether individual hedge funds lose money.
The larger concern is whether interconnected lending relationships could allow losses at one institution to spread through financial markets.
That makes the quality of collateral, counterparty monitoring and intraday risk controls increasingly important as sophisticated trading firms operate with larger positions.
