Regulators in the United States, United Kingdom and Europe have shown concern about investment banks allowing hedge funds to increase their borrowing capacity by using collateral that may rapidly lose value during a financial crisis.
During a meeting on Wall Street, regulators asked bank executives to detail how they use portfolio netting, a practice that allows hedge funds to use illiquid securities as collateral to reduce the overall margin requirements.
Regulators fear if the market dislocates funds might be unable to sell certain securities, increasing the likelihood of a widespread default.