US Fed, BoE step up scrutiny of bank exposure to trading firms after Jane Street loss, FT reports

On September 21, 2023, the Bank of England and the US Federal Reserve are probing global banks regarding their exposure to major trading firms in the aftermath of Situational Awareness's losses, according to the Financial Times. This probe follows substantial financial losses incurred by Jane Street, a renowned trading firm, as a result of the AI-focused hedge fund's misfortune.

Situational Awareness, helmed by former OpenAI researcher Leopold Aschenbrenner, was compelled to offload the majority of its public equities portfolio to Citadel Securities following a significant downturn in AI and chip stocks, resulting in Jane Street incurring a $15 billion loss that month.

The central banks are now seeking comprehensive data on the trading firms' risk tolerance, the evolution of banks' exposure to them throughout the trading day, and the effectiveness of risk controls. However, Reuters could not independently confirm the reported information. Furthermore, neither the US Federal Reserve, the Bank of England, nor Jane Street provided any immediate response to a Reuters inquiry beyond regular business hours.

In the preceding month, the US Securities and Exchange Commission (SEC) had issued subpoenas to several Wall Street banks, including Goldman Sachs, JPMorgan, Citigroup, and Bank of America. These subpoenas pertained to Situational Awareness's trading practices and the utilization of leverage, following its near-collapse. The SEC was particularly interested in the trades that precipitated margin calls and the fund's communications with lenders.