Managing bank exposures to Principal Trading Firms

In the summer of 2024 we considered the scrutiny banking supervisors around the world were continuing to place on counterparty risk management frameworks, with drivers including the growing risks outside the core banking system.

In the UK, the PRA has recently focused on bank risk management capabilities relating to equity financing, fixed income financing, private equity financing and prime brokerage. The PRA has now turned its attention to bank exposures to electronic market makers and liquidity providers, known as Principal Trading Firms (PTFs), highlighting the complex arrangements that exist between banks and firms that act as both clients and competitors.

Rebecca Jackson’s “Frenemies at the gates” speech, delivered on 2 February 2026, focuses on a market landscape that has changed dramatically following post financial crisis regulatory change and significant technological advances, facilitating the rise of non-bank players (including PTFs) in providing liquidity across a range of asset classes.

In this context, the PRA indicates that it will carry out further work with banks on their counterparty risk management frameworks this year, with a specific focus on control of intraday risks.

Overall, the PRA – unsurprisingly – sets a high bar for the controls it expects banks to have in place for their dealings with PTFs, covering all risk types; for the sophistication of their capabilities to monitor and aggregate risks; and for a comprehensive playbook in the event that something goes wrong. This will undoubtedly require banks to enhance some of their controls, including investing in the technology platform that supports them so that any latency gaps in their controls start to narrow rather than widen. The PRA also signals that banks need to get a move on, citing Benjamin Franklin’s remark that “You may delay, but time will not”.

Drivers of regulatory concerns

As highlighted in the FMSB’s 2025 Future of Financial Markets paper, PTFs are already well-established in liquid or vanilla products such as cash equities and FX markets. More recently the role of PTFs has evolved further with growing activities in government bond and credit markets, together with an expansion into roles typically played by investment banks, including block trading and client facilitation.

Whilst the breadth and depth of PTF activity has advanced, PTFs remain reliant on universal and investment banks for a range of services including market access, financing, payments and clearing.

The “Frenemies at the gates” speech discusses the risks the PRA believes should be mitigated, driven by this complex and interconnected relationship between banks and PTFs. Key focus areas include:

Runaway/malfunctioning trading algorithms

The PRA discusses the risk of malfunctioning or runaway trading activity of PTFs, driven by a gap in response times between execution, detection/escalation and human action. While such events may be low probability, the PRA views them as high-impact and plausible given lessons from history.

PTFs’ automated trading continues to generate significantly large volumes of trades intraday. Errors or control failures by a PTF could propagate rapidly across venues and asset classes, meaning losses and exposures may accumulate before its servicing bank(s) can intervene.

To mitigate these risks, the speech references the importance of preventative and intraday controls, including gross cumulative volume and exposure limits to cap the build-up of positions; pre-trade risk controls that prevent excessive risk from entering the market; and kill-switch functionality supported by clear governance and escalation processes.

Inadequate intra-day counterparty risk monitoring

The PRA highlights how PTFs differ from other counterparties, given the volume and velocity of trades they undertake as market makers and liquidity providers.

A recurring theme in the speech is the structural mismatch between the speed of PTFs’ electronic trade execution and the speed of banks’ risk aggregation and detective monitoring capabilities. This creates a window during which material exposures can accumulate without being detected or acted on. Timely and effective intra-day risk management therefore becomes significantly more important, with additional challenges in complex product areas that present non-linear risks. There is a specific emphasis on the criticality of the speed and timeliness of these controls. If the controls operate too slowly in electronic markets, they may not be effective.

The PRA highlights instances where a PTF directly executes trades on venues/exchanges, subject to its own controls and those of the venue/exchange, while their servicing banks are responsible for settlement. In this scenario, intraday exposures to PTFs have risen substantially in recent years in alignment with the growth of PTF activity.

Transparency, due diligence & disclosures

The PRA refers to its previous focus on bank exposures to other non-bank segments, e.g. hedge funds and family offices, and highlights the relative lack of transparency and disclosures from PTFs. The PRA is concerned that this can reduce the adequacy and effectiveness of client onboarding, due diligence and ongoing credit risk assessment processes.

The PRA suggests banks should consider the risk disclosures and information they receive from their PTF counterparties, create an inventory of their touchpoints across asset classes/venues and explicitly consider which controls are being relied upon for their business activities.

Reliance on PTFs’ own control frameworks

The PRA explicitly addresses banks’ reliance on PTFs’ own control environments, particularly where PTFs trade directly on venues and/or orders do not pass through the bank’s own infrastructure. The PRA raises concerns that banks may have limited visibility over how PTFs design and calibrate their controls, suggesting that control effectiveness may vary across individual PTFs. Moreover, banks may not always document (and/or challenge) the extent of their reliance on a PTF’s controls.

Reliance on PTFs’ control frameworks is therefore a potential vulnerability, particularly in fast-moving intraday stress scenarios. The PRA suggests banks should have a methodology for assessing the controls and technology change management processes of any PTFs that pose intraday risks.

Stress testing

The PRA calls for banks to incorporate severe but plausible scenarios involving PTFs into their stress testing frameworks. Some examples are algorithmic failures, sudden liquidity withdrawal, operational or technology incidents and intraday credit and liquidity strain. The emphasis is not only on modelling outcomes, but also on escalation processes and response playbooks. The PRA also suggests banks should have a clear understanding of the legal and contractual protections they have in place over their trading activities with PTFs.

Liquidity risk

Although the speech has relatively little to say about liquidity risk, it is nevertheless clear that this is an essential consideration in relation to banks’ provision of intraday liquidity, settlement services and the financing of any end-of-day positions that a PTF holds. In this context, the PRA notes that banks may act as prime brokers and/or repo counterparties to PTFs. We draw two conclusions from this. First that the liquidity risk considerations outlined by Rebecca Jackson in her January 2025 prime brokerage speech are also relevant here. Second, the February speech makes clear that, when it comes to banks’ overall relationships with PTFs, “the basics are important” and having effective settlement and liquidity risk controls is certainly part of this.

Steps banks should take

Unsurprisingly the PRA’s focus is largely prudential, however its concerns sit alongside broader regulatory scrutiny of algorithmic trading and PTFs by the FCA as detailed in its recent review of algorithmic trading controls (August 2025). Together these underline the continued scrutiny and supervisory emphasis on the governance, transparency and effectiveness of electronic trading frameworks.

Banks and their boards and senior management should be prepared to address a number of key questions:

• Are our exposures and relationships with PTFs transparent, documented and understood? Are senior management aware of and actively considering the associated risks?
• Do we receive adequate information and disclosures from PTF counterparties that enable us to make informed risk-based decisions on an ongoing basis?
• Have we sufficiently invested in our intra-day risk management capabilities and technology to keep pace with the volume, speed and product complexity of electronic trading activity?
• In assessing the effectiveness of the preventative controls and real-time monitoring alerts for early warning signals, have we considered the existence of mechanisms such as cumulative volume limits, pre-trade risk checks and kill-switch functionality, and also their calibration? This includes consideration of whether limits are aligned to intraday risk appetite, gross exposures are monitored alongside net, monitoring latency is appropriate for electronic trading speeds and escalation mechanisms are clearly defined and tested.
• Have we allocated roles and responsibilities for managing the risks of our exposures to PTFs clearly, satisfied ourselves that they are understood and documented them?
• Do we have comprehensive playbooks that consider risk scenarios and how we would respond to mitigate the potentially significant consequences?
• Does our liquidity stress testing include scenarios which take account of our PTF clients’ funding requirements (both intraday and end-of-day)?
• Do our liquidity and counterparty credit risk assessments consider the impact of decisions we might take to increase the collateral and margining requirements on our PTF clients?

How Deloitte can help

Our experience in supporting global banks on enhancing their counterparty risk management frameworks, electronic and algorithmic trading risk management frameworks and broader trading controls suite leaves us ideally placed to support firms with mitigating the potential risks discussed above.

Our teams have assisted firms on their journey through a variety of means, including industry benchmarking, regulatory gap assessments, framework design and implementation support.

To find out how we can support please get in touch.