On Tuesday, Rebecca Jackson of the Bank of England delivered a speech on the growth of prime brokers.

The speech highlighted the rapid expansion of prime brokerage and the increasing need for robust risk management and strategic oversight. With hedge fund assets reaching $8.5 trillion globally, prime brokers are playing an ever more critical role—but are they managing growth sustainably, or just chasing revenue?

🚀 The Growth Story

Prime brokerage has seen persistent high growth, driven by:

📈 Equity Market Appreciation – As stock prices rise, so do the margin loans and synthetic financing transactions required to support them.

🤖 The Rise of Quantitative Hedge Funds – Many rely on high leverage and rapid turnover strategies, increasing their financing needs.

💰 Shift Towards Alternative Investments – With low bond yields, investors are reallocating capital to hedge funds, private equity, and private credit, driving up demand for prime brokerage services.

Prime brokers benefit from economies of scale—internalising financing flows to reduce costs and balance sheet usage. But with growth comes greater exposure to systemic risks.

⚠️ Key Risks That Cannot Be Ignored

The Bank of England has three major concerns that firms need to address:

🔹 Liquidity Risk: Prime brokerage balances—such as excess margin and cash collateral—are highly volatile. The 2008 crisis showed how quickly liquidity can disappear, and the Basel Liquidity Coverage Ratio (LCR) does not fully capture these risks. Firms must implement additional liquidity controls to avoid stress scenarios.

🔹 Operational Resilience: The Equilend cyberattack in early 2024 demonstrated the importance of robust infrastructure in securities finance. Prime brokers process billions in daily transactions, and any disruption—whether from cyber threats or internal system failures—can have systemic consequences. Firms must reassess their business-critical dependencies and ensure resilience is embedded in their strategy.

🔹 Counterparty Credit Risk (CCR): The Archegos collapse showed how prime brokers were extending vast amounts of leverage to clients they didn’t fully understand. A recent Bank of England thematic review found that many firms still lack sufficient client risk disclosures.
Firms must now:
✅ Establish clear disclosure standards for clients
✅ Use gross exposure and absolute leverage metrics (not just netted values)
✅ Strengthen internal governance and escalation processes

📢 The Prime Brokerage Industry is at a Crossroads

The Bank of England has made it clear—firms cannot afford to overlook the risks that come with scale. New entrants must ensure they have the right infrastructure, while established players need to enhance governance, liquidity controls, and client due diligence.

Please get in touch to discuss this further.

SecFin Solutions