On 28 January 2025, the Prudential Regulation Authority (PRA) published a speech on prime brokerage, which was delivered by its Executive Director for Authorisations, Regulatory Technology and International Supervision, Rebecca Jackson.

The speech discusses the growth of prime brokers and the PRA’s expectations of them, emphasising the importance of liquidity risk, operational resilience and counterparty credit risk management. Ms Jackson explains that, as supervisor of some of the largest prime brokers in the world, the PRA is ‘deeply invested’ in ensuring that activity is regulated and supervised well. She discusses the recent dynamics in the sector and share some insights from a recent thematic review into the disclosures that prime brokers receive from their clients.

In light of the persistent, high growth in the prime brokerage sector over the past decade or so, Ms Jacksons flags that the PRA expects to see all prime brokers start using measures of gross exposure and absolute leverage to understand and control their business better. She also warns that the PRA will have “zero tolerance” for new entrants to the market that have inadequate due diligence and risk oversight.

Areas highlighted in the speech as a focus for the PRA include:

  • Liquidity risk: Ms Jackson notes the importance of the Liquidity Pillar 2 framework, which is intended to complement the Basel liquidity coverage ratio by specifically capturing the outflows associated with a run on a firm’s prime brokerage business.
  • Operational resilience: Prime brokers are reminded that maintaining operational resilience is a dynamic activity, and that those that do not currently regard their activities as an ‘important business service’ may need to reassess that conclusion, particularly where they have customers without multiple prime brokers, and set an impact tolerance for risks such as cyber and systems stability.
  • Counterparty credit risk (CCR) management: Ms Jackson explains that the FCA expects prime brokers to have a framework in place to assess the quality of their counterparties’ disclosures, set minimum standards for disclosure (including frequency), and ensure that risk appetite decisions discriminate between clients based on the full range of disclosures. There should also be transparent governance around exceptions to the firm’s disclosure standards.

Looking ahead, Ms Jackson confirms that the PRA will continue with thematic work in this area, and notes that firms should have regard to the recently published Basel guidelines on CCR management which give a ‘strong sense’ of the risks the PRA cares about and the practices it expects to see.