Algorithmic trading

Consultation Paper 5/18
Published on 12 February 2018

Background

This consultation paper (CP) sets out the Prudential Regulation Authority’s (PRA’s) proposed expectations regarding firms’ governance and risk management of algorithmic trading. 

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

For non-EEA (‘third country’) firms operating in the United Kingdom through a branch, the PRA will continue to follow the supervisory approach set out in SS10/14 ‘Supervising international banks: the Prudential Regulation Authority’s approach to branch supervision’ and will continue to consider the home regulator’s approach to internal governance and controls. Proposed amendments to SS10/14 in CP29/17 ‘International banks: the Prudential Regulation Authority’s approach to branch authorisation and supervision’ (closing 27 February 2018), create a specific expectation that third country branches will have appropriate risk management in place to support the critical functions they undertake, including managing risks stemming from algorithmic trading.

The proposals in this CP are based on a cross-firm review carried out by the PRA between November 2014 and March 2017. The review highlighted areas where the PRA considered that further clarification was needed on its expectations as to how firms can demonstrate compliance with the relevant regulatory requirements. 

Summary of proposals

The PRA proposes to introduce an SS on algorithmic trading that would set out the PRA’s expectations of firms’ governance and risk management in respect of algorithmic trading activity. The PRA expects to complement this SS with future work, and where necessary policy proposals, in areas such as operational resilience. The PRA intends to publish a Discussion Paper on operational resilience in 2018.

The PRA proposes that the algorithmic trading SS applies from Saturday 30 June 2018: this date aligns with the implementation of EBA revised guidelines on internal governance under Directive 2013/36/EU and joint ESMA and EBA guidelines on the assessment of the suitability of members of the management body and key function holders under Directive 2013/36/EU and Directive 2014/65/EU.

Responses and next steps

This consultation closed on Monday 7 May 2018. The PRA invites feedback on the proposals set out in this consultation. Please address any comments or enquiries to CP5_18@bankofengland.co.uk.

PDF Consultation Paper 5/18

PDFPress release

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