On 15 June 2018, the PRA published Policy Statement 12/18: Algorithmic trading (PS12/18). PS12/18 provides feedback to responses to Consultation Paper 5/18: Algorithmic trading. It also contains the final Supervisory Statement 5/18: Algorithmic trading (SS5/18).  SS5/18 applies to all algorithmic trading activities of a firm including in respect of unregulated financial instruments such as spot foreign exchange.

SS5/18 sets out the PRA’s expectations in respect of a firm’s algorithmic trading activities in a number of areas: governance; algorithm approval process (by the firm); testing and deployment; inventories and documentation; and risk management and other systems and controls functions.

SS5/18 takes effect from 30 June 2018. Any remediation work required by firms to meet the expectations after 30 June 2018 will be taken forward through the PRA’s normal supervisory activities.

SS5/8 should be read alongside the Algorithmic Trading Part of the PRA Rulebook and:

  • Commission Delegated Regulation (EU) 2017/565 on organisational requirements and operating conditions for investment firms;
  • the General Organisational Requirements Part and Risk Control Part of the PRA Rulebook;
  • the European Securities and Markets Authority (ESMA) guidelines on systems and controls in automated trading environment trading platforms;
  • joint ESMA and European Banking Authority (EBA) guidelines on the assessment of suitability of members of the management body and key function holders; and
  • EBA guidelines on internal governance.

The PRA reports on page 5 of PS12/18 that it has made certain changes to SS5/18 from the one consulted on. Such changes include amending:

  • paragraph 3.3(c) to make it clear that each function that has a role in the approval of algorithms (e.g. front office, risk management, and other systems and controls functions) should sign off on the risks relevant to them. The PRA states that some respondents had interpreted the paragraph to mean that each function should sign off on all risks that an algorithm could expose the firm to;
  • paragraph 4.5(b) to clarify that, when testing algorithms, firms are only expected to document material differences between the test environment and production environment rather than all differences; and
  • paragraph 5.29(c) so that the expectation is that inventories and documentation will be available, rather than immediately available.

In terms of inventories and document, the PRA expects a firm to have the following:

  • a single and comprehensive inventory of algorithms;
  • a single and comprehensive inventory of risk controls;
  • documents that set out each algorithm’s strategy and risk mitigants;
  • documents that set out the algorithmic trading system architecture; and
  • documentation of kill-switch controls procedures.

Such inventories would be:

  • reviewed by staff independent of the development of the algorithms;
  • reviewed at least annually and updated if necessary;
  • accessible by all the firm’s personnel who have responsibility for the oversight of algorithmic trading; and
  • available to the PRA on request.