On 10 March 2025, the Financial Conduct Authority (FCA) published the findings from its multi-firm review of liquidity risk management at wholesale trading firms.

Background

The FCA notes that, over the past few years, it has engaged with firms that had experienced instantaneous and firm-specific liquidity shocks during stress events such as the COVID pandemic, the Russia/Ukraine war, the nickel price spike, energy price volatility and others. Those liquidity shocks included large cash outflows due to margin-calls, buy-ins of large open short settlement positions, and instances of poor management of client relationships.

Recent Dear CEO letters to sell-side firms (including to wholesale brokers in January 2023 and January 2025, to principal trading firms in August 2023 and to wholesale banks in September 2023) have seen the FCA flag various issues and expectations relating to liquidity risk management. The FCA flags that sell-side wholesale firms subject to the IFPR should, by definition, not be globally systemic; however, many are key participants in certain specific markets like commodities, metals, and energy, whose structure differs from equities, fixed income or derivatives. It warns that a disorderly failure of one or more of these firms in these markets has the potential to amplify market wide shocks and could cause significant disruption, as they provide crucial clearing and settlement services to other market participants and could pose contagion risk if they fail.  

Key findings

In its findings, the FCA summarises its observations from the multi-firm review it carried out of liquidity risk management at a range of wholesale trading (sell-side) firms, particularly brokers, that are in scope of the Investment Firms Prudential Regime (IFPR). Key observations included:

  • Many firms were applying approaches to liquidity management that were appropriate and proportionate to the nature, scale and complexity of their business model. However, some had weaker approaches that were not commensurate with their size, complexity and the instantaneous nature of their liquidity risks. Often these firms had not updated their assumptions in the light of the events of the last few years.
  • Several firms had weaknesses in their approach to liquidity stress testing and contingency funding plans that lacked a range of contingency actions to allow them to mitigate even commonly identified liquidity stress scenarios in a timely manner. The FCA flagged that these findings reinforce the message from their Dear CEO letters regarding a lack of experience and under-estimation of the severity of events.
  • All firms in the study identified intra-day (T0) and inter-day (T1) stressed cash outflows as their primary liquidity risk, with firms modelling, on average, 80% of their stressed liquidity outflows occurring on T0 or T1.

The findings also set out the good and poor practices identified by the FCA in the following areas: governance and risk culture; stress preparedness; contingency funding plans and wind-down plans; and liquidity risk management capabilities. The FCA suggests that similar firms reference these good and poor practices to strengthen their approach to liquidity risk management.

Actions

Following the reviews, the FCA provided direct feedback to all in-scope firms, including identified weaknesses and areas for improvement. Where it identified potentially critical weaknesses, firms were provided with prompt initial feedback. The FCA plans to continue to use these and other regulatory tools where it finds firms are not properly managing their liquidity risks.

Next steps

The FCA explains that the publication setting out its findings is part of a broader communication process, and that it plans to organise roundtables with firms, industry trade bodies and consultants to share its observations and findings. It also intends to take questions and participate in practical discussions aimed at improving liquidity risk management in the sector and encourage adoption of good practices.