Fed, BoE expand checks on banks’ ties to trading firms

The Federal Reserve and the Bank of England have intensified requests for information from global banks about their exposures to large trading firms following Jane Street’s reported $15 billion loss in July.

Regulators have sought data on banks’ links with market makers and specialist trading firms, including Jane Street and Citadel Securities. The requests focus on how positions and collateral change during the trading day and on the controls banks use to manage fast-moving risks.

Jane Street’s losses came after a sharp reversal in artificial-intelligence–linked stocks and from its exposure to Situational Awareness, a hedge fund that unwound much of its public-equity portfolio. The firm has expanded beyond short-term market making into longer-duration and proprietary positions as it has grown.

Regulators are examining prime-broker relationships. Prime brokers provide financing, market access, securities lending and clearing to hedge funds and trading firms. If a client’s positions deteriorate quickly, a bank can face losses when collateral falls short or a counterparty defaults.

The Bank of England is reviewing rising exposures among London-based prime brokers, including a rapid expansion of financing for Asian equities earlier in the year. The Prudential Regulation Authority has warned about growing intraday exposures at firms that provide market access, clearing and financing to electronic market makers.

U.S. authorities have separately sought information about the hedge fund involved in the episode. The Securities and Exchange Commission has issued subpoenas to several major banks for records related to the fund’s trades and lender communications; banks contacted include Goldman Sachs, JPMorgan, Citigroup and Bank of America. JPMorgan ended its lending relationship with the fund, while other banks have continued to provide brokerage services.

Regulatory enquiries aim to capture intraday shifts in leverage and collateral values that end-of-day reporting can miss during extreme volatility. The scrutiny reflects the larger role of specialist trading firms since banks reduced proprietary trading after the global financial crisis. These firms now combine market making with proprietary strategies and have complex ties to hedge funds, exchanges and banks.

The Federal Reserve, the Bank of England and Jane Street did not provide comments on the enquiries.