This is the Fed’s polite way of saying, “There’s a lot more leverage under the hood than people realize.”
What stands out is how fast the prime brokerage and repo lines have climbed over the last few years. Prime broker financing tells you equity books are running bigger and more levered. Repo financing tells you fixed income trades, especially Treasury arbitrage have ballooned. Put together, it shows a market leaning heavily on borrowed money at a time when both volatility and issuance have been rising.
And here’s the part that matters: this kind of leverage works beautifully when everything is calm. It juices returns, smooths spreads, and makes the whole system look more liquid than it really is. But it cuts the other way when conditions shift. If funding tightens, haircuts rise, or volatility jumps, these same trades unwind quickly…not because sentiment changes, but because margin calls force them to.
So the chart is a reminder of how modern markets function…hedge funds provide liquidity, but they also borrow a lot to do it. As long as financing stays easy, this structure holds. When it wobbles, this is exactly where cracks tend to show up first.
