The Bank of England is examining whether investment banks operating in the UK are overly exposed to Asian equities through their prime brokerage businesses, amid growing concerns over concentrated leveraged positions in AI-related stocks held by hedge funds and other investors, according to a report by the Financial Times.
The report cites unnamed people familiar with the matter, as revealing that the Prudential Regulation Authority (PRA), the Bank’s supervisory arm, has launched a review of prime brokerage activities in London to assess banks’ exposure to rapidly appreciating Asian technology shares and the risks associated with financing highly leveraged client positions.
London has become a key hub for global investment banks providing financing to hedge funds investing across Asia. The business has expanded rapidly as strong gains in AI-related semiconductor and technology companies have increased the value of client portfolios, enabling investors to borrow more against their holdings.
Regulators are understood to be focusing on whether exposures have become too heavily concentrated in a relatively small group of companies benefiting from the artificial intelligence boom. Popular holdings include semiconductor supply chain businesses such as SK Hynix, TSMC and China’s Cambricon Technologies.
The review follows heightened market volatility across the sector. While AI-related stocks have generated substantial gains, sharp price swings have highlighted the risks associated with leveraged trading. South Korean memory chip producer SK Hynix, for example, recently suffered a significant one-day decline, underscoring the potential for rapid losses.
Officials are also examining whether some hedge funds are increasing leverage through derivatives, including options, and whether certain trading strategies rely on funding sourced from Asian retail investors, which could prove less stable during periods of market stress.
Prime brokerage has become an increasingly important source of revenue for global investment banks, with financing activity linked to Asian markets expected to rival or exceed earnings generated from Europe for several major firms.
The PRA’s review could lead to a range of supervisory responses depending on its findings. These may include direct engagement with individual banks, broader industry guidance or public comments from senior regulators if systemic risks are identified.
Where supervisors determine that banks are assuming excessive prime brokerage risk, they have the authority to require firms to hold additional liquid assets, strengthening their ability to withstand market dislocations or losses arising from the failure of highly leveraged clients.
