1
Introduction
1.1
This supervisory statement (SS) sets out the PRA’s expectations of a firm’s risk management and governance of algorithmic trading and should be read alongside: Commission Delegated Regulation (EU) 2017/565 on organisational requirements and operating conditions for investment firms[1] (if applicable); the General Organisational Requirements Part and Risk Control Part of the PRA Rulebook; European Securities and Markets Authority (ESMA) Guidelines on systems and controls in automated trading environment trading platforms;[2] Joint ESMA and European Banking Authority (EBA) Guidelines on the assessment of suitability of members of the management body and key function holders;[3] and EBA Guidelines on internal governance.[4]
Footnotes
- 1. Commission Delegated Regulation (EU) 2017/565 of 25 April 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive.
- 2. www.esma.europa.eu/sites/default/files/library/2015/11/esma_2012_122_en.pdf
- 3. www.eba.europa.eu/documents/10180/1972984/Joint ESMA and EBA Guidelines on the assessment of suitability of members of the management body and key function holders (EBA-GL-201712).pdf
- 4. www.eba.europa.eu/documents/10180/1972987/Final Guidelines on Internal Governance (EBA-GL-201711).pdf/eb859955-614a-4afb-bdcd-aaa664994889
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1.2
This SS applies to firms that engage in algorithmic trading[5] and are subject to the rules in the Algorithmic Trading Part of the PRA Rulebook and Commission Delegated Regulation (EU) 2017/589.[6] It also applies to all algorithmic trading activities of a firm including in respect of unregulated financial instruments such as spot foreign exchange (FX).
Footnotes
- 5. As defined in the Algorithmic Trading Part of the PRA Rulebook.
- 6. Commission Delegated Regulation (EU) 2017/589 of 19 July 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council with regard to regulatory technical standards specifying the organisational requirements of investment firms engaged in algorithmic trading.
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1.3
In setting these expectations, the PRA considers that a firm’s risk controls are critical to ensuring appropriate governance arrangements are in place when engaging in algorithmic trading. Such controls express the risk appetite of a firm’s governing body and include, for example, restrictions as to the types of security that can be traded and eligibility of counterparties.
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1.4
The PRA sets expectations in respect of a firm’s algorithmic trading activities in a number of areas:
- Governance;
- Algorithm approval process (by the firm);
- Testing and deployment;
- Inventories and documentation; and
- Risk Management and Other Systems and Controls functions.
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