Dear CEO Letter Review
A recent 2023 FCA ‘Dear CEO’ letter addressed to Principal Trading Firms1 outlined their Financial Resilience, and Algorithmic Trading. The key points for Algo Trading are below:
The FCA’s previous review in 2018 revealed multiple weaknesses in governance, oversight frameworks, and controls, causing concern about the impact on market integrity.
Senior Management Functions (SMF) members are accountable for ensuring governance and controls are top-down, comprehensive, monitored, and embedded.
* Regulatory Technical Standards
1 Portfolio letter: Our supervisory strategy for Principal Trading Firms (fca.org.uk)
2 UK RTS6: organisational requirements of investment firms engaged in algorithmic trading, providing direct electronic access and acting as general clearing members
3 UK RTS7: organisational requirements of regulated markets, MTF and OTFs enabling or allowing algorithmic trading through their systems
Controls
supervisory strategy, including their focus on Operational Resilience,
The annual self-assessment which is mandatory for investment firms, must be proven to be compliant with the requirements of RTS 6 and Article 17 of MiFID II.
The PRA released a supervisory statement with particular focus on testing and development, inventories / documentation, and internal audit functions.
Are you ready?
The FCA announced an impending multi-firm review of RTS* 62 and RTS 73 which will focus on identifying weaknesses in algorithmic trading Governance and controls. If they find material weaknesses and non-compliance they will “act to ensure risks are mitigated”.
UK Algorithmic Trading Governance & Controls
What the FCA will require you
Governance and Oversight
Are you ready to evidence the following?
► Governance framework with clear lines of accountability, separation of responsibilities for 1st and 2nd Lines, and effective procedures for issue escalation
► Accurate algorithm inventories and material change records
► Ensuring SMRs, risk management and compliance have the up-to-date technical knowledge and training to provide effective challenge and oversight
► Sufficiently resourced compliance functions who are involved at all key milestones, e.g. in development, testing, and deployment
Market Conduct
Are you ready to evidence the following?
► Aiding market integrity by having fit-for-purpose frameworks and tools to monitor specific risks from your algo trading strategies
► Combined expertise of front office and compliance to ensure that strategies consider market implications
► Monitoring a comprehensive list of market abuse scenarios, e.g. momentum ignition, quote stuffing, reference price gaming
► Tailoring monitoring and surveillance systems to specific risks within algorithmic trading activities
► Suitable market abuse training for relevant members of staff
Cost
of doing nothing?
► Risk of Fines: Firms risk first additional regulatory oversight and/or
► Reputational: Firms run the risk of potential suspensions of their
Controls you to evidence
Risk Controls
Are you ready to evidence the following?
► Pre and post trade controls that are robust and sophisticated enough to monitor, identify, and reduce potential trading risks
► Maintaining detailed controls at multiple levels, e.g. by algo, portfolio, data input or cyber
► Controls are effective and remain appropriate by way of regular reviews
► Ensuring an independent risk function oversees risk controls and preagrees levels that authorised first line staff can adjust/amend controls
Development & Testing
Are you ready to evidence the following?
► Development and Testing Framework is fully embedded and consistently applied across all aspects of the business
► Regular checkpoints have been made throughout the development and testing process with a full review at the end of each stage that includes the involvement of independent committees to ensure procedures have been followed
► Consistent use of stress testing and scenario analysis pre-roll out
► Comprehensive audit trails and documentation throughout development, testing, and deployment lifecycle
and/or business restrictions before potential incurrence of substantial fines from regulators their licenses to trade or the designation of Senior Management Functions (SMF) individuals
UK Algorithmic Trading Governance & Controls What We Can Do For You
Although infrastructure is key to the running of a successful algorithmic trading operation, regulatory environment are major factors. We are experts in financial markets, supporting Management frameworks with increased efficiency, help train both board-level and firm wide
Algo Governance Framework Review
We can review your existing – or design and implement a new – comprehensive governance framework. We can also support embedding it, and offer solutions to improve your current state
Best Practice Review
We can compare your existing regulation and identify gaps. it against industry best practice peer benchmarks
Controls
operation, risk management, the team’s expertise and the supporting our clients to build and embed improved Risk wide employees, and provide regulatory assurance.
existing practices against the gaps. We can also compare practice using relevant
Annual Self-Assessment & Validation Report Review
We offer a full review of your existing annual selfassessment and validation report, ensuring that it is fit-for-purpose and provide you with regulatory assurance and Waterfall change methodologies.
UK Algorithmic Trading Governance & Controls Our Team
Nick Wilcock
Risk and Regulatory SME
Nick is a Director with the Consulting division at Delta Capita. He is a Risk and Regulatory specialist with over 30 years’ experience in Financial Services.
In his previous roles, Nick has been the accountable executive for EMEA BCP and DR strategy and execution at a Tier 1 Investment Bank. He has also developed his own consulting practice providing advisory services on Operational Risk Reduction and regulatory standards.
Georgios
Petropoulos
Risk and Regulatory
George is a Managing Director division at Delta Capita. He risk management leader with Markets experience. George has held multiple senior Markets businesses, with his the accountable Risk executive a Tier-1 Investment Bank. His Market Risk Officer, Head of Macro Market Risk. George infrastructure experience, knowledge regulatory capital.
Controls
Petropoulos
Regulatory SME
Director in the Pricing and Risk is a seasoned trading and with significant Financial senior roles within Financial his most recent position being executive for the non-core unit of His prior roles include Group of FX Trading, and Head of possesses extensive Markets knowledge in analytics and
Claire Suttie
Risk and Regulatory SME
Claire is a Principal Consultant within the Consulting division at Delta Capita. She is a Change and Transformation professional with over 24 years’ experience and solid regulatory change experience. She has end-to-end change delivery expertise with a core skill set of scoping complex Programmes and building Operating Models to support change and transformation. Involvement in three largescale migration Programmes. Experience of both Agile and Waterfall change methodologies.
UK Algorithmic Trading Governance & Controls Credentials
The Delta Capita team have multiple success stories demonstrating our experience and confidence in delivering a variety of projects in
Review of e-FX trading controls post EUR/CHF de-pegging
Tier 1 UK Investment Bank
► Responsible for performing a review of governance, pre- and post- trade controls of the e-FX low touch trading activity post EUR/CHF depeg with the objective to propose additional controls.
► Outlined proposal to update controls to mitigate potential future losses and presented to Board Risk Committee.
MIFIDII Governance & Controls
UK Asset Manager
► Full topic-by-topic post-implementation review across the investment manager business, producing regulatory gaps log & requirements document.
► Implementation planning & delivery of trading desk level and Board level policy and process changes to close gaps.
Controls
Gap analysis to FRBNY guidance on FX electronic trading
Tier 1 Swiss Investment Bank
► Post an initial supervisory visit led a review of risk management controls.
► Identified risk management gaps and established intra-day monitoring and reporting of risk controls.
► Liaised with FRBNY supervisory team successfully to avoid an MRA
Group Programme Lead BA (MIFIDII)
UK Banking Group
► Responsible for Programme-wide regulatory traceability and scoping of all topics including Regulatory reporting, Algorithmic trading governance & controls, Derivatives, Commodities and client categorisation.
Appendix Summary of RTS 6 and RTS
The impending review by the FCA will addresses firms’ weaknesses in RTS 6 and RTS 7. Below are summaries of their key takeaways:
RTS 6 – Investment Firms
General Organisational Requirements
► General organisational requirements
Firms must have clear lines of accountability for approving development, deployment, and updates, efficient communication procedures, and a separation of tasks to prevent unauthorised trading activity concealment.
► The compliance function
Ensure compliance staff understanding of algorithmic trading systems, maintaining continuous contact with technically knowledgeable personnel, and providing access to “kill functionality” and those responsible for each system.
Resilience of Trading Systems
► Testing and Deployment of trading algorithms systems & strategies
Firms must have clear methodologies for developing and testing new systems, algorithms, or strategies. This involves conformance testing in a distinct testing environment, before being deployed with predefined limits.
► Post-Deployment Management
Firms must perform an annual self-assessment and validation process on its systems and strategies, including performing stress testing on procedures and controls, as well as robust procedures for material changes.
► Means to Ensure Resilience
Firms must have kill functionality, an automated surveillance system to detect market manipulation, business continuity arrangements, both pre and post-trade controls, real-time monitoring, and limits to access.
RTS 7?
RTS 7 – Trading Venues
General Organisational Requirements
► Governance of trading venues
Clear lines of accountability, effective communication procedures, and separation of tasks, with senior management approval, capacity expansion measures, and actions to address identified shortcomings and performance reviews.
► Staffing and Compliance
Firms are required to have sufficiently trained and resourced staff in compliance, in their outsourced resources, as well as both managing the algorithms and systems inhouse.
Capacity and Resilience of Trading Systems
► Testing
Firms must be able to evidence clear testing methodologies, including providing conformance testing to their actual and prospective members. They are also required to test members’ algorithms to avoid disorderly trading conditions.
► Monitoring & Controls
Firms are required to undertake at all time real-time monitoring both of the performance and the usage of their systems. This includes a periodic review of the performance and capacity of their systems.
► Business Continuity & Security
Firms are responsible for ensuring business continuity to address disruptive incidents, including: the prevention of disorderly trading conditions; management of volatility; access and limits to access of permissions.
Timeline Q1 24
December ‘24
Algo Team
Marketing
Finalised draft of the Algo Flyer completed
January
Ongoing process of Identifying and managing possible
Distribution Channels review
Sales
Maturing Open Products Template, Framework
DEI Analysis of the makeup of your firm
Direct to consumer communications testing
Consumer Support
COT – Utilise data insights to drive change
Ongoing process of identifying and supporting Vulnerable Customers
‘24
FCA due to issue Dear CEO portfolio letters, likely to have a CD focus
February ‘24
FCA due to issue 2024/25 Business Plan, likely to have a CD focus
FCA likely to require firm updates against industry findings – timelines TBD
March ‘24
harm
Complete Closed Products Review