UK Prudential Regulator Confirms Algorithmic Trading Expectations

Following its consultation in February 2018, the Prudential Regulation Authority has published a Policy Statement and final new Supervisory Statement on Algorithmic Trading. The Supervisory Statement sets out the PRA's supervisory expectations of firms in relation to their algorithmic trading activities and covers: (i) governance; (ii) a firm's algorithmic approval process; (iii) testing and deployment; (iv) inventories and documentation; and (v) risk management and other systems and controls functions.

The Supervisory Statement applies to firms that engage in algorithmic trading and that are subject to the PRA's rules on algorithmic trading as well as the Regulatory Technical Standards on the organizational requirements of investment firms engaged in algorithmic trading (Commission Delegated Regulation (EU) 2017/589) under the Markets in Financial Instruments package. The Supervisory Statement applies to all of a firm's algorithmic trading activities, including those related to unregulated financial instruments.

Third-country firms operating in the U.K. through a branch should consider the PRA's policy on algorithmic trading. However, the PRA confirms that it will continue to follow the approach set out in the Supervisory Statement, "International banks: the Prudential Regulation Authority's approach to branch authorisation and supervision" (SS1/18).

The Policy Statement sets out the PRA's response to feedback received to the consultation proposals. As a result of the feedback, the PRA has made a few changes to the Supervisory Statement. Briefly, those changes are:

• Clarification that each function with a role in the approval of algorithms should sign off on the risks relevant to their role, not all of the risks.
• Clarification that firms are only expected to document material differences between the test and production environment, not all of the differences.
• Amending the expectation that inventories and documentation be 'immediately available' to only being 'available' to all personnel with responsibility for the oversight of the firm's algorithmic trading.

The PRA's expectations set out in the new Supervisory Statement will apply from June 30, 2018. The PRA states that any remediation work that firms need to carry out after that date will be progressed through the PRA's usual supervisory activities.

View the Policy Statement (PS12/18).

View the Supervisory Statement (SS5/18).

View details of the PRA's consultation and the FCA's paper, "Algorithmic Trading Compliance in Wholesale Markets".