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PRA Publishes Policy and Supervisory Statements on Algorithmic Trading; FCA Publishes List of Overseas Cooperation Agreements for Outsourcing Portfolio Management

PRA Publishes Policy and Supervisory Statements on Algorithmic Trading

On June 15, the UK Prudential Regulation Authority (PRA) published a policy statement and a supervisory statement on algorithmic trading.

While the PRA’s policy only directly applies to PRA-regulated and dual-regulated firms, such as banks, UK Financial Conduct Authority-regulated firms (e.g., most proprietary trading firms) may wish to take into account the PRA’s expectations regarding governance and risk management in relation to their algorithmic trading activity.

The policy and supervisory statements follow the Bank of England and PRA’s consultation paper, which was published in February 2018. Five responses were received to the consultation paper; the PRA stated that these were generally supportive of the proposals for the risk management and governance of algorithmic trading. The respondents also supported further clarification and alternative wording in certain areas.

The policy statement includes the PRA’s feedback to the responses, along with final decisions and the rationale for related amendments to the supervisory statement, including the following changes in light of respondents’ comments:

  • Algorithm approval process—Each function that has a role in the approval of algorithms (including, front office, risk management, and other systems and controls functions) is expected to sign off on the risks which are relevant to them, rather than all the risks applicable to a specific algorithm.

  • Testing and deployment—When testing algorithms, firms are only expected to document material differences between the test environment and production environment, rather than all differences.

  • Inventories and documentation—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 expectations in the supervisory statement will take effect from June 30. Any remediation work required by firms after that date will be carried out as part of the PRA’s ordinary supervisory role.

The PRA policy statement and supervisory statement are available here and here respectively.

FCA Publishes List of Overseas Cooperation Agreements for Outsourcing Portfolio Management

On June 14, the UK Financial Conduct Authority (FCA) published a list of cooperation agreements it has in place in relation to the outsourcing of portfolio management. The list contains the supervisory authorities in three countries with which the FCA has cooperation agreements that meet the requirements of the Commission Delegated Regulation (EU) 2017/565 on organizational requirements and operating conditions for investment firms (MiFID Org Regulation).

The list, which includes the United States, Switzerland and Japan, can be used by firms to assess their compliance with the MiFID Org Regulation. Firms should also examine the outsourcing requirements set out separately in the MiFID Org Regulation, as well as those in the FCA Handbook.

The FCA’s list of cooperation agreements is available here.

©2018 Katten Muchin Rosenman LLP

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John Ahern, Financial Attorney, London, Katten Law Firm
Partner

John Ahern, partner at Katten Muchin Rosenman UK LLP and head of the London Financial Services group, focuses his practice on banking, financial services, UK and European financial markets, and related regulations. His background in private practice and as in-house counsel at a global investment bank provides him with perspective on the unique regulatory issues facing the wholesale and private banking sectors. John advises multilateral trading facilities, broker-dealers and banks on trading, clearing and settlement as well as custody of securities—both physical and...

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Carolyn H. Jackson, International Attorney, Katten Muchin law firm
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Carolyn Jackson is a partner in Katten Muchin Rosenman UK LLP and is a Registered Foreign Lawyer. She provides US financial regulatory legal advice to a broad range of market participants, including commercial banks, investment banks, investment managers, broker-dealers, electronic trading platforms, clearinghouses, trade associations and over-the-counter derivatives service providers.

Carolyn guides clients in the structuring and offering of complex securities, commodities and derivatives transactions and in complying with US securities and commodities laws and regulations. 

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Nathaniel Lalone, Katten Muchin Law Firm, Financial Institutions Attorney
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Nathaniel Lalone, a partner at Katten Muchin Rosenman UK LLP, has a broad range of experience in the regulation of financial products and financial markets, and frequently provides regulatory and compliance advice to trading venues, clearing houses and buy-side firms active in the over-the-counter (OTC) derivatives, futures and securities markets. He is actively involved in advising clients on the implementation of MiFID 2 and MiFIR in the European Union as well as the international reach of US financial services regulation. He also has significant experience with structuring...

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Neil Robson, private equity fund managers counselor, Katten Law Firm, London
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Neil Robson, a regulatory and compliance partner with Katten Muchin Rosenman LLP, focuses his practice on counseling hedge and private equity fund managers and other investment advisers on operational, regulatory and compliance issues. He regularly addresses Financial Conduct Authority (FCA) and EU authorization and compliance under both the EU Alternative Investment Fund Managers Directive (AIFM Directive) and MiFID, cross-border issues in the financial services sector, market abuse, anti-money laundering and regulatory capital requirements, formations and buyouts of...

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