In some market segments, especially in more complex ones, a large share of trading volume is attributed to HLIs. However, measured by assets under management, the HLI industry is still small compared to traditional investment funds and the trading books of large international banks. Because of its modest size, its  14  See also The President's Working Group on Financial Markets, 2007, recommendation 5. BIS Review 74/2007  5  heterogeneity and its absence from the field of financial intermediation, the HLI industry is no direct threat to financial stability. Nevertheless, there are two channels through which a shock occuring in the HLI industry could be transmitted to systemically relevant banks. First, banks are exposed to HLIs in their role as counterparties and creditors. Second, in periods of stress, banks may suffer from a lack of market liquidity and a decline in prices, and this may be aggravated by HLIs. Potential regulatory measures should therefore focus on the link between the HLI and the banking industry. Of particular importance is that banks simulate their risk exposures to HLIs and the liquidity situation in periods of stress. We encourage the private sector to take the initiative and come up with measures which will enhance market discipline and strengthen banks' resilience to losses from HLIs and adverse market situations. At present, we do not see a need for direct regulation of HLIs.
Moreover, by helping to spread market and credit risks more widely, they may increase the resilience of large banks. 2  Unlike regulated investment funds, HLIs can use leverage without any restrictions; in other words, they can borrow to increase the capital available for investment. If a HLI had capital of USD 1 and borrowed a further USD 1, it could invest a total of USD 2. In this example, leverage would be 1. In other words, leverage is the ratio of debt to equity capital. 3  McCarthy, 2006. 4  Financial Stability Forum, 2007. 5  De Nederlandsche Bank, 2007, table 1. 2  BIS Review 74/2007  HLIs have proved to be quite robust to stock market drops. In stress situations in the last decade, the HLI industry incurred less losses than stock indices. The exception was the Russian crisis in 1998 with the collapse of LTCM. 3. Are HLIs a threat to financial stability? In this section I analyse first, whether HLIs represent a direct risk to financial stability and second, whether there are transmission channels through which HLIs could indirectly weaken either systemically important banks or the banking sector as a whole. As already mentioned, the size of the HLI industry is comparatively small, from both an individual and an aggregate point of view. Moreover, the HLI industry is highly segmented and there is a broad range of different investment strategies.