Hedge funds now have $40 trillion in gross notional exposures, linking their leverage, crowded positions and investor withdrawals to dealers and funding markets. The IMF warns that these vulnerabilities can amplify market stress.

India’s reserve and FX measures affect bank liquidity and hedge costs, while ADIB’s approved rights issue would support financing growth. Basel implementation gaps and borrower and funding pressures in Malaysia and the UK test bank resilience; European and UK proposals would change fund redemptions and market supervision.

Read more on the week’s key developments:

1. IMF puts hedge fund gross notional exposures at $40 trillion

The International Monetary Fund (IMF) reported on 6 October that hedge funds had about $13.0 trillion in gross assets under management and $40 trillion in gross notional exposures, including off-balance-sheet positions. They held approximately 9% of US Treasuries in 2025. During stress, stocks most widely held by hedge funds were 10 percentage points more volatile and had peak-to-trough losses four percentage points deeper than the least-held stocks. The IMF identified leverage, crowded positions and investor withdrawals as vulnerabilities that can reinforce one another.

Gross notional exposure is not a measure of potential bank losses. Stress can spread through dealer repo, derivatives and prime-broker financing when leveraged funds face margin calls or sell crowded assets. Falling collateral values can intensify pressure, making it important for counterparty tests to capture overlapping exposures across these channels.

2. RBI tightens daily reserve rules ahead of bond sale

On 9 October, the Reserve Bank of India (RBI) raised banks’ minimum daily cash reserve ratio (CRR) maintenance from 90% to 99% of the prescribed requirement, effective from the fortnight beginning 16 October. The headline CRR remains unchanged. The RBI also scheduled an INR 250 billion ($2.6 billion) government-bond sale for 13 October, with settlement on 14 October. Under rules issued on 10 October, authorised dealers must deposit with the RBI a cash Foreign Exchange Risk Reserve (FERR) equal to 20% of the rupee-equivalent notional of each new INR-linked derivatives contract above $2 million used to hedge a current-account transaction in which the client buys foreign currency against the rupee.

The CRR change and bond sale are aimed at absorbing liquidity from a system in surplus. RBI Governor Sanjay Malhotra said the surplus had averaged about INR 7.3 trillion ($75.5 billion) since early September. Higher daily reserve maintenance leaves banks less room to manage reserves within the fortnight, while the FERR could raise the cost of qualifying hedges. The bond sale’s liquidity impact will depend on the amount accepted and settled.

3. ADIB shareholders approve AED 1.75 billion capital raise amid financing growth

Abu Dhabi Islamic Bank (ADIB) announced on 6 October that shareholders had approved a rights issue expected to raise AED 1.75 billion ($476.5 million) in gross proceeds. The bank plans to issue 106.4 million new shares at AED 16.45 each. The proceeds would strengthen its common equity base and support financing growth under its Vision 2035 strategy. Subscription and completion remain subject to regulatory approvals, including from the Central Bank of the UAE.

The capital raise follows rapid balance-sheet expansion. ADIB’s gross customer financing grew 26% year on year to AED 210.0 billion in June 2026, while risk-weighted assets rose 15% to AED 203.3 billion. Its Common Equity Tier 1 (CET1) ratio declined from 12.7% in June 2025 to 12.2% in June 2026. New common equity would add headroom for financing growth and loss absorption, although further asset expansion would use some of that capacity. Returns on new financing will show whether the additional capital is being put to work effectively.

4. RBI updates derivative counterparty capital rules

On 7 October, the RBI finalised amendments to the Standardised Approach for Counterparty Credit Risk (SA-CCR) and a revised Credit Valuation Adjustment (CVA) framework for commercial banks, effective 1 April 2027. SA-CCR will be mandatory for banks with an international presence or outstanding derivatives with a consolidated group-wide book value of at least INR 250 billion ($2.6 billion) as of the reporting date. Other commercial banks may use either the Current Exposure Method (CEM) or SA-CCR. The revised rules clarify treatment of margin agreements, netting sets, clearing transactions and options. The CVA framework introduces the Basel basic approach, with reduced and full versions.

SA-CCR calculates counterparty exposure by recognising netting, collateral and margin more explicitly than the simpler CEM approach. The revised CVA framework varies capital treatment by counterparty sector and credit quality; its full basic approach recognises eligible credit-spread hedges. Banks with consolidated non-centrally cleared derivatives notional of INR 10 trillion ($103.4 billion) or less may instead set CVA capital at 100% of their counterparty credit-risk capital charge, without recognising CVA hedges, subject to supervisory discretion. Capital impacts will vary with margining, options and eligible CVA hedges.

5. EBA projects greater output-floor impact for 33 banks

The output floor would raise minimum capital requirements for 33 EU and EEA banks under full implementation, according to the European Banking Authority’s (EBA) 9 October CRR3/CRD6 dashboard. Using second-quarter 2026 data from 129 banks, the EBA projected a 6.0% increase in minimum Tier 1 capital requirements, up from 5.1% on end-2025 data, mainly because of a larger floor effect. The average projected CET1 ratio was 15.1%. The figures are an impact assessment, not an immediate demand for new capital.

The 6.0% average masks uneven effects across banks. The floor limits how far a bank’s model-based risk-weighted assets can fall below 72.5% of its standardised calculation once the rules are fully phased in. Banks whose internal models produce much lower risk estimates would therefore face a larger increase in required capital than the average suggests.

6. Basel Committee finds final reforms effective in fewer than half of jurisdictions

The Basel Committee reported on 5 October that three quarters of its 27 member jurisdictions had published regulations implementing the full set of final Basel III reforms by end-September 2026. But the package was effective for banks in only 47% of jurisdictions. Revised credit-risk and operational-risk standards and the output floor were effective in about 85%, while revised market-risk standards applied in just over 40% and the CVA standard in nearly 70%. Almost all jurisdictions had announced implementation by April 2027 or earlier.

The gap between published rules and those in force complicates comparisons of reported capital strength and trading-book returns. Banks with similar portfolios can face different requirements and implementation costs, particularly for market risk and CVA. Only one additional jurisdiction brought revised market-risk standards into force in the past year, leaving banks in different jurisdictions subject to different trading-book capital rules. The update tracks implementation, not bank-level capital shortfalls.

7. BNM identifies pockets of borrower stress despite strong bank buffers

Bank Negara Malaysia (BNM) said in a 5 October financial-stability analysis that the Middle East conflict was pressuring some borrowers through higher input and logistics costs, rather than direct regional exposures. Repayment stress was concentrated among small and medium-sized enterprises (SMEs) in transport, wholesale and retail trade, and primary manufacturing. Malaysia’s business-loan impairment ratio was 2.8% in June 2026, while overall business lending grew 7.3% year on year. Loans to some lower-income households that were two or three months in arrears also rose marginally, with the increase more pronounced among lower-income borrowers.

The main transmission channel is weaker cash flow and greater working-capital reliance among smaller businesses with thin liquidity buffers, rather than broad-based credit withdrawal. BNM said banks’ total capital ratio was 17.9%, aggregate liquidity coverage was 149.6% and the banking-system impairment ratio held at 1.4%. These buffers reduce the risk that isolated repayment problems become a system-wide funding constraint.

8. UK lenders report tighter credit and higher retail deposit costs

Two Bank of England surveys released on 8 October pointed to reduced availability of secured household credit and higher retail-deposit costs. The weighted net balance for secured-credit availability fell from 2.6 to -15.5, showing a shift in lenders’ responses towards reduced availability. The credit-card-default balance remained positive at 25.7, down from 37.4, indicating that reported increases in defaults still outweighed decreases, but by a smaller margin. Retail-deposit spreads over reference rates rose, partly offset by lower costs for other funding. The surveys covered the three months to end-August and were collected from 17 August to 4 September.

Availability also fell for unsecured household and SME credit, while overall corporate availability was unchanged. Demand for house-purchase, remortgage and SME lending also declined, so weaker availability coincided with softer demand. Higher retail-deposit costs may pressure margins if lending rates reprice slowly, partly offset by lower costs on other funding.

9. FCA proposes 90-day redemption notice for funds holding illiquid assets

The UK Financial Conduct Authority (FCA) proposed on 8 October that certain UK-authorised retail funds outside the EU’s standard framework for retail investment funds must allow no more than one redemption dealing day a month and require at least 90 days’ notice if inherently illiquid assets account for at least 50% of fund property. The proposal covers funds that offer regular dealing while investing predominantly in assets that can take much longer to sell. Existing funds would have two years to comply and must give investors at least one year’s notice. Consultation CP26/35 closes on 11 December; these are proposed, not final, rules.

Aligning redemption terms with the time needed to sell illiquid assets could give managers more time to arrange sales and reduce forced disposals or cash buffers. Investors would have less immediate access to funds, while providers would need to update dealing processes and communications.

10. EU Council backs direct ESMA supervision of major market operators

The Council of the European Union agreed key elements of a negotiating position on 9 October that would transfer direct supervision of significant cross-border trading venues, central counterparties and central securities depositories to the European Securities and Markets Authority (ESMA). The approach provides for a two-year transition with ESMA-led teams comprising EU and national experts, and a voluntary pan-European licence for qualifying market operators. The Council’s agreement sets its negotiating mandate; talks with the European Parliament can begin once Parliament has adopted its position.

The financial-market regulators designated by each EU member state currently supervise these infrastructures; the responsible authorities vary by country and type of infrastructure. ESMA promotes consistent oversight and coordinates across borders. For groups operating across several states, this division can mean different interpretations, overlapping requirements and slower coordination. Direct ESMA supervision would give the largest cross-border operators one EU-level authority for final assessments, with national regulators contributing expertise.