EXCLUSIVE-Britain examines revamp of capital rules for likes of Citadel Securities and XTX

By Phoebe Seers and Tommy Reggiori Wilkes

LONDON, Dec 16 (Reuters) - Britain's financial regulator is reviewing capital requirements for specialist trading firms such as Citadel Securities, Jane Street and XTX, citing a "real opportunity" to make rules more proportionate and enhance the UK's competitiveness.

Electronic market-makers have flourished in the past decade, using algorithms and computing power to deliver faster pricing to capture rising trading volumes across assets, and gain market share from banks limited by post-financial crisis rules.

The current regime for calculating market risk capital was inherited from the European Union and designed for large, systemically important banks, an official at the Financial Conduct Authority (FCA) told Reuters. Updating or replacing it could free up capital for trading firms, the regulator said.

“We want to ensure that the requirements are proportionate to the risk of harm,” Mark Francis, interim director of wholesale sell-side, said. “It’s not a race to the bottom on capital requirements.”

Britain's ruling Labour Party wants regulators to cut red tape to aid weak economic growth, and the government has sought to use some of its post-Brexit freedoms to support London's competitiveness as a global financial centre.

MARKET MAKERS HANDLE HUGE VOLUMES OF TRADES

Most of the biggest market-making names, which include Ken Griffin's Citadel, Virtu Financial VIRT.N and Susquehanna, are U.S.-based, but London-based XTX, founded by billionaire mathematician Alex Gerko, has emerged as a major player in foreign exchange markets.

XTX employs just 250 staff but reports $250 billion in trading volumes daily, according to its website, and made profits of more than 1.2 billion pounds ($1.6 billion) in 2024.

Jane Street says it operates on more than 200 electronic exchanges and other venues, while Citadel Securities handles $654 billion a day in trades including a third of all U.S.-listed retail volume.

These mostly privately held firms recruit mathematicians, geophysicists and machine-learning experts to price and trade financial instruments. Their researchers and traders can earn huge sums of money, often far more than at banks.

The FCA on Tuesday published a paper seeking views on how to reform the existing mandatory requirements for calculating market risk capital for investment firms.

OPTIONS ON THE TABLE

Market risk capital rules are designed to ensure firms can handle losses when prices move unexpectedly. Applied system-wide, they help keep financial markets stable.

Revamp options range from tweaking the existing EU-aligned rules to an overhaul of the regime that could see the UK aligned with the U.S. “net risk rules” approach, or using an internal model to calculate minimum requirements.

“We do think that a more proportionate approach does have the potential to remove unnecessary barriers for existing firms, potentially for new ones too,” Francis said.

Chirag Tyagi, the FCA's head of department, Financial Resilience, said technology in the market-making industry was evolving rapidly "so you might have new products coming in."

"For example, some firms are now entering into tokenization and crypto assets and that gives rise to different types of market risks, so we want to future-proof our rules to the extent they can," Tyagi added.

($1 = 0.7484 pounds)