UK Prudential Regulation Authority clarifies policy on algorithmic trading

Maria Nikolova

The new rules, which become effective on June 30, 2018, apply to all algorithmic trading activities of a firm including in respect of unregulated financial instruments such as spot foreign exchange (FX).

After a consultation on the proposed new rules for algorithmic trading firms, the UK Prudential Regulation Authority (PRA) has earlier today published its Policy Statement (PS) and final Supervisory Statement (SS) concerning these rules.

The statements are relevant to firms that engage in algorithmic trading and that are subject to the rules in the Algorithmic Trading Part of the PRA Rulebook (the ‘Algorithmic Trading Part’) and Commission Delegated Regulation EU 2017/589. They apply to all algorithmic trading activities of a firm including in respect of unregulated financial instruments such as spot foreign exchange (FX).

Let’s recall that the new rules require a firm to have an algorithmic trading policy which must:

  • identify the firm’s algorithmic trading activity, including where it is undertaken within the firm;
  • define the term ‘algorithm’ as used by the firm in the context of algorithmic trading;
  • prescribe the process for the approval and decommissioning of an algorithm;
  • outline the testing and validation process for algorithmic trading, including who has responsibility for these activities.
  • set out minimum requirements for the monitoring and risk management of algorithmic trading, including escalation procedures relating to limit breaches.

The PR will also require a firm to have manual and automated controls that stop trading or prevent user access and with manual intervention required to re-start trading, that is, ‘kill-switch’ controls. The list of expectations also concerns testing of algorithms and risk controls. Prior to any algo deployment, the PRA expects, at a minimum, a firm to assess the latency of the algorithmic trading system. The firm has to ensure that the latency does not adversely impact operations, including the intended operation of the risk controls.

In the documents published today, the PRA explains that, following consideration of respondents’ comments, it has made some changes to the Supervisory Statement.

Regarding the algorithm approval process, the rules have been amended to make it clear that the PRA’s expectation is that each function that has a role in the approval of algorithms (eg Front Office, Risk Management, and Other Systems and Controls functions) should sign off on the risks relevant to them. Some respondents had interpreted this paragraph to mean that each function should sign off on all risks that an algorithm could expose the firm to.

In respect of testing and deployment, the proposed rules have been amended to clarify that, when testing algorithms, firms are only expected to document material differences between the test environment and production environment rather than all differences.

With respect to inventories and documentation, the rules have been changed to show that the expectation is that inventories and documentation will be available, rather than ‘immediately available’, to all personnel who have responsibility for the oversight of algorithmic trading.

The PRA notes that for non-EEA (‘third-country’) firms operating in the United Kingdom through a branch, the regulator will continue to follow the approach set out in SS1/18 “International banks: the Prudential Regulation Authority’s approach to branch authorisation and supervision” and will continue to consider the home regulator’s approach to internal governance and controls.

Read this next

Institutional FX

CLS FX volume continues downward trend in August

Total daily traded volume submitted to CLS for settlement took yet another step back in August.

Digital Assets

Huobi taps AstroPay to facilitate fiat-to-crypto payment in Latin America

Huobi, the world’s sixth-largest crypto exchange by trading volume, has recently partnered with payment solution provider AstroPay to launch local currency account deposits and withdrawals in Latin America.

Digital Assets

Crypto exchange FTX to raise $1 billion at flat valuation of $32 billion

FTX is reportedly in discussions with a clutch of heavyweights from traditional finance to raise up to $1 billion in fresh funding to fuel more deal-making.

Digital Assets

Revolut US launches trading on Avalanche, Solana, and Dogecoin

British fintech and banking firm Revolut has further expanded its cryptocurrency offering in the US with the addition of 29 new tokens.

Digital Assets

Bahrain greenlights eazyPay to launch Binance Pay

The Central Bank of Bahrain has blessed a new partnership inked by Binance with Eazy Financial Services ‘eazyPay’, a local POS and online payment service provider. The greenlight enables EazyPayto to launch Bitcoin and cryptocurrency payments in the region.

Digital Assets

Coinbase approved to offer crypto for Dutch users

Nasdaq-listed crypto exchange operator Coinbase has been handed regulatory approval to operate as a crypto service provider in the Netherlands.

Metaverse Gaming NFT

AC Milan partners with Solana-based NFT football game MonkeyLeague

“Partnering with champions like AC Milan, an absolute iconic Club throughout footballs history, is another testament to what we are building and where we are headed as a game and game studio. It also represents a key step in our plans to bridge the Web2 and Web3 worlds.”

Digital Assets

Shariah-compliant Islamic Coin to support SDG-compliant ventures, green projects, and philanthropy

Shariah-compliant Islamic Coin has recently launched a collaboration with the World Green Growth Organization and the International Youth Conference 6, taking place on September 22-25th and September 30th-October 1st, 2022, in New York. 

Market News

Week ahead: US core PCE and eurozone CPI 

We heard from a range of central banks last week and the update sparked big moves in the markets, and the bulk of the volatility was in currencies.

<