Fed and Bank of England Probe Banks' Exposure to Jane Street and Citadel Securities
nashnova research
The Fed and Bank of England are demanding global banks disclose lending to Jane Street and Citadel Securities — triggered directly by July's blowup of a 4× leveraged AI fund that lost 78% in a single month. Regulators are now asking: did anyone actually monitor these exposures in real time?
What exactly blew up?
The "Situational Awareness" fund, founded by former OpenAI researcher Leopold Aschenbrenner, ran roughly 4× leverage via Goldman Sachs total-return swaps — contracts that let the fund bet on stock moves without buying shares directly — going long AI hardware and short software. By June it was up 439% with $45 billion under management.
In July, AI stocks pulled back while software rallied. Both legs bled at once. Nebius, Sandisk, and SharonAI each fell roughly 50%; SK Hynix dropped nearly 50%. Margin calls piled up, and the fund liquidated all public equity positions within days.
This means → when you bet a single theme at high leverage, a reversal hits both sides simultaneously, and no hedge can save you.
Who picked up the pieces — and who profited?
Citadel's Wellington fund bought the entire portfolio in under 24 hours at roughly a 10% discount, beating out Millennium and Jane Street. Wellington rose 5.94% that month — its best since 2022 — with about half its year-to-date gains coming from this single trade.
Over the next three weeks, Citadel flipped more than 80% of those positions through roughly 100 block trades totaling over $4 billion.
Goldman earned over $200 million in fees from financing the fund — its highest-paying single prime-brokerage client. In plain terms = the fund blew up, but the bank providing the leverage and the hedge fund buying the wreckage were the biggest winners.
How much did Jane Street lose — and why are regulators focused on it?
Jane Street was both an investor in the Situational Awareness fund and heavily positioned in AI momentum names — Sandisk, Micron, Broadcom, Super Micro (SMCI) — on its own book. It lost roughly $15 billion in July alone.
Yet the loss was not existential. By early August, Jane Street's year-to-date net trading revenue had reached $40 billion, surpassing its full-year 2025 record of $39.96 billion.
This reflects the regulators' core concern: a market-maker that can lose $15 billion in one month is taking risks far beyond what a typical market-maker would, and the size of banks' lending exposure to it was not transparent.
What exactly are regulators investigating?
The Fed and the Bank of England's Prudential Regulation Authority (PRA) are pressing on three questions: how much risk appetite these trading firms carry, how banks' exposures shift intraday, and whether risk controls actually work under extreme stress.
In plain terms = regulators are asking a fundamental question — when AI trades reversed sharply in July, were prime brokers genuinely monitoring intraday margin in real time, or did they only discover the gap after the fact?
This signals a deeper worry of the post-Volcker Rule era: trading risk has migrated from bank proprietary desks to market-makers and hedge funds, but regulatory oversight has not migrated with it — risk may be quietly accumulating in a supervisory blind spot.
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