The dispute was triggered by plans outlined by the FCA at the end of last year to relax capital rules for the trading firms it regulates, with the stated aim of boosting liquidity in financial markets and reducing barriers to entry. The proposals followed a call from the Treasury as part of its broader push for growth and competitiveness in financial services.

The current rules, inherited from the EU, were largely designed around the trading operations of investment banks.

The FCA argued that because these firms do not accept deposits or serve external customers, their failure would carry less systemic risk than that of a bank or asset manager. The regulator said its reforms were intended to encourage wholesale trading and improve market liquidity.

However, the BoE has greeted the proposals with considerable scepticism. Officials at the central bank are concerned that loosening the rules could leave major trading firms less resilient in a crisis, thereby increasing risks to financial stability, Financial Times reports.

“You want trading to be there in bad times as well as good times,” one official familiar with the discussions said. “We need to think about what incentives this will create and what impact it will have.”

The bank is also concerned about the exposure of the lenders it supervises to these trading firms. Earlier this year, Rebecca Jackson, an executive director at the Bank of England, called on banks to improve their risk management to better handle the growing scale and complexity of their relationships with such firms.

The stand-off reflects the rising prominence of specialist trading companies, which have fundamentally reshaped financial markets over the past decade. Firms such as Ken Griffin’s Citadel Securities, Jane Street and Alex Gerko’s XTX buy and sell hundreds of billions of dollars’ worth of securities in milliseconds, earning a small margin on each transaction.

Some also deploy their market-making expertise to take outright positions in the markets. These companies began seizing market share from large banks after the 2008 financial crisis, capitalising on the electronification of markets and the tighter regulations imposed on traditional lenders in its aftermath.

Unlike the major banks, specialist trading firms are not subject to the same extensive capital requirements designed to protect depositors and safeguard financial stability. Rivals in the United States, Canada and Hong Kong operate under a net capital rule that is often less demanding than equivalent requirements in the UK or the EU.

“If you are unnecessarily tying up capital that is not going to be attractive,” said one executive at a large US trading firm. “When you have other places to trade it won’t be your first option.”

The trading firms themselves have broadly welcomed the FCA’s proposals. The European Principal Traders Association argued that a bank-style regulatory framework had “unduly constrained liquidity provision” in the UK, and that the rules should better reflect the actual risk posed by these businesses. The major banks, however, have been less enthusiastic.

The Association for Financial Markets in Europe, which represents many of the large lenders, warned the FCA of its “significant concerns” that the changes could heighten the likelihood and impact of systemic risks.

The BoE’s Financial Policy Committee, on which the head of the FCA also sits, holds the power to direct the regulator to act should it identify a specific threat to financial stability, a mechanism that could yet prove significant as the two bodies seek to resolve their differences.

Both the Bank of England and the FCA declined to comment. The latter is expected to publish updated proposals later this year.