(Bloomberg) -- The Bank of England is reviewing lenders’ practices within their prime brokerage businesses as part of a long-running review into their exposure to hedge funds and other non-banks.
Starting about six weeks ago, on-site examiners for the central bank’s Prudential Regulatory Authority have asked banks with operations across London how much information their hedge fund clients are disclosing about their business and whether it was enough for them to understand the risks involved in the prime brokerage business, according to people familiar with the matter.
Regulators are also examining these lenders’ rates and commodities businesses, the people said, asking not to be identified discussing non-public information. The latest reviews — which are part of the central bank’s routine visits to lenders across London — follow several earlier rounds that were initiated after major events in European markets.
Those included the implosion of Archegos Capital Management, the 2022 market turmoil that followed when many pension funds didn’t have enough cash to cover their liability-driven investment hedging strategies as well as the 2022 nickel crisis, when the London Metal Exchange suspended the nickel market and retroactively canceled $12 billion of trades.
A representative for the BOE declined to comment.
It’s unclear if there was a specific market event that prompted this latest round of reviews. They come as lenders’ prime brokerage revenue have soared in recent years: the top 12 prime brokers made about $20.4 billion from the business in 2023, up about 25% from a decade ago, according to Coalition Greenwich.
The PRA investigators have, at times, been accompanied by regulators at the Federal Reserve and other counterparts from watchdogs around the world, the people familiar with the matter said. The central bank is about halfway through this latest round of on-site reviews, one of the people said.
The central bank has asked firms to supply their policies and procedures within the prime brokerage business as well as data on the nature and scale of their lending to non-banks, the person familiar with the matter said.
The Bank of England has repeatedly warned that it’s growing concerned about the amount of leverage banks give to their non-bank clients in markets and how that can amplify vulnerabilities in the global financial system.
After their review of banks’ businesses in the aftermath of the collapse of Archegos and the LDI crisis, the BOE sent letters ordering banks to clean up their equity financing and fixed income finance businesses. The central bank may do the same after its latest round of on-site reviews wraps up, the people familiar with the matter said.
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