On 4 August 2023, the FCA published a letter it had sent to CEOs of firms categorised as Principal Trading Firms (PTFs).
The letter sets out the FCA’s strategy for supervising PTFs, its view of the most important risks arising from PTFs, what the regulator thinks drives those risks, its expectations of PTFs and its supervisory focus for the next two years.
Among other things the letter notes that:
- PTF activities convey responsibilities to the UK and its financial markets. Firms in this portfolio are important stakeholders in the reforms being implemented through the Wholesale Markets Review and the consultations the FCA is issuing this year, such as the recently published proposals for the establishment of a bond consolidated tape, and the planned consultation on commodity derivatives.
- Many PTFs are highly technology-dependent, and an operational incident at the larger firms in the portfolio has the potential to cause harm to wider markets. These factors place a premium on all firms to ensure they are operationally resilient, including having effective cyber-security.
- Algorithmic trading is an important part of financial markets, and it is critical that firms consider the market conduct implications of their trading activity and the impact it has on overall market integrity. The FCA expects firms to devote appropriate resources to maintaining effective oversight functions and controls aimed at reducing the impact of any trading incidents on the orderly functioning of the markets they operate in, including where firms deploy AI systems. The FCA also expects firms to be able to show how their systems and controls have been tailored to reflect the nature, scale, and complexity of their business models.
- The FCA will undertake targeted reviews of firms’ capital and liquidity now that the new Investment Firm Prudential Regime has been introduced.
- The FCA’s expectations on firms to have appropriate financial resources, apply to all firms in the PTF portfolio. The regulator also has a particular additional focus on commodity trading firms within the portfolio due to recent periods of market volatility.
- The FCA expects firms that are in scope of its operational resilience rules as set out in Policy Statement 21/3 to consider how they will embed the requirements and ensure they operate within their impact tolerances as soon as reasonably practicable, but no later than 31 March 2025.
The FCA expects PTF’s CEOs and boards to discuss the contents of the letter, consider how the risks apply their business, and take action to manage them effectively.