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Hedge funds to face UK stress test

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Hedge funds Brevan Howard, Citadel, Millennium Capital Partners, Rokos Capital Management and Capula Investment Management are on a list of more than 50 City institutions to take part in the Bank of England’s first-ever stress tests involving the shadow banking sector, according to a report The Guardian.

The list also includes large banks such as HSBC, Goldman Sachs, JP Morgan and Merrill, as well as insurers including Aviva and Legal & General, and clearing houses, asset managers, and pension funds.

The test is aimed at helping regulators understand how the firms react to one another’s decisions during a market downturn, and how their actions could collectively “amplify shocks in UK financial markets that are core to UK financial stability”.

The shadow banking system has doubled in size since the 2007-08 financial crisis and now accounts for about half of the global corporate loans, but does not face the same levels of oversight as the traditional banking sector.

The two-phase test will examine how firms would respond to a hypothetical economic shock, as well as a second scenario, based on the group’s collective actions during a heightened state of financial stress.

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