The FCA has published a Report reviewing Algorithmic Trading Compliance in wholesale markets, outlining core areas of focus and good/poor practice.
Firms are recommended to reference legislation in developing their Algorithmic Trading Practices and Procedures, particularly MiFID II. Chapter 7A of the Market Conduct Sourcebook (MAR) and the MiFID II Commission Delegated Regulation 2017/589 of 19 July 2016 (also known as RTS6), both refer. Key MiFID II requirements focus on:
- The adoption of a standard information set where Banks have more than 20,000 Business Current Accounts;
- Firms must establish an appropriate process to identify Algorithmic Trading across the business
- Appropriate Governance and Oversight Frameworks must demonstrate effective challenge from Senior Management, Risk management and Compliance on Algorithmic Trading Activities
- Robust, consistent and well understood Development and Testing processes must be in place, identifying potential issues across Trading Algorithms prior to implementation
- Firms must appropriately consider the potential impact of their Algorithmic Trading on market integrity, monitor for potential conduct issues and reduce Market Abuse Risks
- Suitable and robust pre and post trade controls must be developed to monitor, identify and reduce potential Trading Risk across Algorithmic Trading Activity
The FCA considers that whilst progress has been made, further improvement is needed in a number of areas. The Regulator has identified that some firms lacked suitable processes to identify Algorithmic Trading and did not have appropriate documentation in place to demonstrate suitable development and testing procedures are maintained. In conjunction, Firms also lacked robust and comprehensive Governance Frameworks. More work is required to identify and reduce potential conduct risks created by Algorithmic Trading strategies. This includes delivering suitable market abuse training for staff involved in development and implementation processes.
The FCA will continue to assess whether firms have taken sufficient steps to reduce risks arising from Algorithmic Trading, focusing on MiFID II Investment Firms and those non-MiFID investment firms (e.g. Collective Investment Firms undertaking Algorithmic Trading and who are subject to the relevant requirements under MiFID II Article 17.
To read more, please follow this link https://www.fca.org.uk/news/press-releases/fca-publishes-report-supervision-algorithmic-trading
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Please Note: This publication is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to. Readers should take legal advice before applying the information contained in this publication to specific issues or transactions.
Source and credit: Compliancy Services