On 2 June 2021, there was published a letter from David Bailey and Sarah Breeden of the PRA, and Edwin Schooling Latter of the FCA, to Chief Risk Officers of regulated firms to share observations of good practices on risk controls and arrangements for DvP clients.
The PRA and FCA report in the letter that in recent years they have observed a number of incidents involving defaults by clients who transact solely in cash products settled on a Delivery versus Payment (DvP) only basis (DvP clients). These defaults have typically happened during periods of high price volatility, and in some cases, led to material losses at firms.
The letter shares the PRA’s and FCA’s observations on good practices that they encourage firms to incorporate within their control framework, to more effectively monitor and mitigate counterparty credit risks in this area. The observations on good practices are relevant to all trading activity with DvP clients including electronic trading platforms.
Firms are encouraged to consider the good practices mentioned in the letter, with a view to incorporating them in their risk management of DvP clients. The PRA and FCA also encourage firms to consider any associated conduct risk issues while implementing measures. The PRA and FCA request an update from firms outlining what steps they have taken on the back of this letter by the end of Q4 2021, through the usual supervisory channels.