US Banks Under Fire as Equity and FX Swaps Hit Record $29 Trillion
Major US banks are facing scrutiny over their handling of equity and foreign exchange (FX) swaps, as exposures reach record levels. Concerns have grown among investors about pre-hedging practices, which some argue resemble front-running. Meanwhile, the sheer scale of these derivativesânow totalling trillions in notional valueâhas raised questions about risk management and market dominance.
By September, the six largest US banks held a combined $4 trillion in equity swaps. JP Morgan led with $1.1 trillion in exposure, followed by Goldman Sachs at $934 billion. For every dollar of cash equity on their books, these institutions held five dollars in derivatives, covering both long and short bets.
The surge in equity swap activity has forced banks to ramp up exposures as market valuations climb. This, in turn, pushes them closer to Value-at-Risk (VaR) limitsâthough none of the top six reported a breach in the third quarter. Critics argue that pre-hedging client orders gives dealers an unfair edge, effectively allowing them to trade ahead of the market.
In FX markets, swaps remain the dominant instrument, with daily turnover hitting $4 trillion in April 2025. Total notional amounts for FX swaps at the same banks reached $25 trillion by September. Citigroup held the largest share, with $9.5 trillion in exposures. These derivatives are primarily used for yield enhancement rather than pure hedging, benefiting from the banksâ leveraged balance sheets. Their ability to post collateral for trillions in notional trades gives them a structural advantage over smaller players.
The concentration of equity and FX swap exposures among a handful of banks highlights their market influence. With trillions at stake, regulators and investors are watching closely for signs of risk mismanagement or unfair trading practices. The lack of VaR breaches so far does little to ease concerns about the long-term stability of these positions.
