Banks say UK plans to ease trading-firm capital rules risk broader financial instability

UK regulators are weighing proposals to reduce capital burdens for electronic trading firms that have increasingly supplanted banks in market-making activity, and major banks have flagged this shift as a potential threat to financial stability. The central dispute is whether the absence of depositor exposures makes these firms intrinsically less systemic, or whether their concentrated market roles and contractual linkages can transmit shocks rapidly through trading venues, clearing houses and counterparty networks. Bank executives told FCA officials that liquidity provision is now highly concentrated, that algorithmic strategies rely on sophisticated risk models that can fail in stressed conditions, and that the tight coupling with exchanges and central counterparties creates channels for fast contagion. Regulators argue that failures would not look like classic bank runs, but banks counter that market runs and fire-sale dynamics can be equally destabilizing for price formation and settlement. The debate has been sharpened by a parallel set of warnings from international standard-setters about leverage in fixed-income markets: the Financial Stability Board and others have highlighted how higher leverage, liquidity mismatches and concentrated positions can accelerate deleveraging and cross-border spillovers. Those bodies have urged improvements in margining, collateral practices, and transparency around large traded positions and secured funding chains—measures that would help supervisors see where leverage sits across intermediaries, funds and counterparties. Incorporating those recommendations would change the terms of the UK debate, shifting focus from sole reliance on capital metrics to a wider set of mitigants such as tighter margin frameworks, better data-sharing, mandatory participation in recovery arrangements, and stress-testing calibrated to algorithmic behaviour. Banks warn that loosening capital without those compensating policies could move fragile exposures onto market plumbing and leave clearinghouses and traditional banks bearing second-round losses. The discussion also reflects competitive dynamics: electronic trading firms have taken substantial market share from banks in flow businesses, and regulatory asymmetry could further tilt incentives toward higher leverage and lower buffers. Policymakers therefore face a trade-off between reducing frictions for fast-moving market participants and preserving the resilience of trading ecosystems, especially in thinner fixed-income segments where market-making capacity is limited. The outcome will shape incentives for risk-taking, the distribution of backstop responsibilities, and the degree of cross-border regulatory coordination needed to contain spillovers.