The U.S. Federal Reserve and the Bank of England are reportedly intensifying scrutiny of global banks’ exposure to major trading firms after extraordinary market turmoil left Jane Street with losses of roughly $15 billion in July.
The regulatory attention follows the near-collapse of Situational Awareness, an artificial-intelligence-focused hedge fund managed by former OpenAI researcher Leopold Aschenbrenner.
According to data, the fund came under severe pressure after a sharp selloff in artificial-intelligence and semiconductor stocks. It was ultimately forced to sell most of its publicly traded equity portfolio to Citadel Securities.
The turmoil had significant consequences for Jane Street.
The proprietary trading giant reportedly lost around $15 billion during July, particularly through its investment in Situational Awareness and other technology-related holdings.
The scale and speed of those losses have raised broader questions about how much risk large trading firms are taking—and how closely major global banks are financially connected to them.
The Federal Reserve and Bank of England are now asking banks for information about their exposure to large proprietary trading firms and market makers.
Regulators reportedly want to understand the firms’ risk appetite, how banks’ exposures changed throughout individual trading days and whether internal risk-management systems operated effectively when markets became volatile.
The inquiries reflect a larger transformation in global finance.
Since the 2008 financial crisis, stricter regulations have pushed traditional banks away from some riskier trading activities. At the same time, nonbank institutions—including hedge funds, private-credit firms, market makers and proprietary trading companies—have become increasingly influential.
Firms such as Jane Street and Citadel Securities now play enormous roles in global financial markets, providing liquidity and trading across equities, bonds, derivatives and other assets.
Their expansion has created new connections with traditional banks.
Banks provide financing, credit lines, derivatives and other services that allow trading firms to operate at enormous scale. During normal market conditions, those relationships can function efficiently. But when highly leveraged positions suddenly collapse, losses can move rapidly across institutions.
That is the risk regulators are attempting to understand.
The investigation also extends beyond the central banks.
In August, the U.S. Securities and Exchange Commission subpoenaed several major Wall Street banks, including Goldman Sachs, JPMorgan Chase, Citigroup and Bank of America.
The SEC is examining Situational Awareness’ trading activity and its use of leverage before the fund’s near-collapse.
Investigators are reportedly interested in the trades that generated margin calls as well as communications between the hedge fund and its lenders.
Margin calls can become particularly dangerous during rapidly falling markets. When the value of leveraged investments declines, lenders can demand additional collateral. If investors cannot provide it, they may be forced to sell assets quickly.
Those forced sales can push prices even lower, creating a feedback loop in which falling markets generate additional margin calls and further liquidations.
The July episode therefore highlights a broader concern surrounding the enormous investment boom in artificial intelligence.
AI and semiconductor stocks have attracted extraordinary amounts of capital, creating significant profits but also increasing concentration among investors exposed to the same technology-related assets.
A sudden reversal can consequently produce losses far beyond an individual hedge fund.
The inquiries appear designed to determine whether banks adequately understand the risks created by their relationships with increasingly powerful nonbank trading firms.
The central question extends well beyond Jane Street’s $15 billion loss.
As hedge funds and proprietary trading firms become larger and more interconnected with traditional banks, regulators must determine whether financial safeguards developed after the 2008 crisis still capture where the most important risks now reside.
The July turmoil provides a powerful reminder: risk may have moved outside traditional banks, but the financial connections capable of transmitting that risk throughout the system have not disappeared.
