The FICC Markets Standards Board (FMSB) has published a new Statement of Good Practice on algorithmic trading in FICC markets as a transparency draft for market consultation. FMSB members and other interested parties are invited to comment on the proposed Statement of Good Practice. This consultation will run until Friday 21 August 2020 with the final document expected to be published shortly thereafter.
FMSB observes that as the use of algos continues to increase, “the potential for such trading activities to adversely impact market or firm stability, or result in harm to clients, also rises”. Accordingly, it continues, algorithmic trading has increasingly been the subject of regulatory scrutiny and intervention.
The Statement of Good Practice draws on the work conducted by regulators to date and seeks to further enhance the integrity and effective functioning of FICC markets by promoting good conduct and governance practices for participants engaged in algorithmic trading across all FICC asset classes and markets, in particular those subject to less stringent regulatory requirements.
It sets out 10 Good Practice Statements which cover the governance of, and management of conduct risks associated with, the use of algorithmic trading. These are:
- The need for an appropriate governance framework to provide clear lines of responsibility for, and oversight of, algorithmic trading. This framework should include appropriate governance designed to provide for the proper management of risks associated, including conduct, market and operational risk. Furthermore, such a framework should allow for sufficient granularity of oversight of such risks.
- The requirement to maintain a complete list (or lists) and description of the algorithms which market participants use.
- The presence of pre- and/or post-trade controls in operation which are appropriate to the activity and the risks posed. Firms shall have regard to the nature of the activity and the size and complexity of their firm when determining appropriateness.
- The need to consider conduct, market, operational and other risks prior to deployment and as part of firms’ periodic review of algorithms. The second line of defence should provide oversight of this process and if they have specific risk concerns, should have authority to prevent an algorithm from being used or deployed.
- A definition of, and the requirement to, adhere to minimum standards applicable to algorithmic trading and trading systems and the requirement to ensure that these are documented and implemented through written internal policies and procedures.
- Market Participants providing client execution services using algorithms should provide appropriate information to those clients that takes account of the services being provided and consider reviewing client materials relating to algorithmic trading periodically in order to ensure that they are clear, fair and not misleading.
- The presence of appropriate software development and change management processes applicable to their development and deployment of new, or changes to existing, algorithms.
- The establishment of processes to ensure appropriate ongoing oversight, surveillance and monitoring of algorithmic trading or the trading system (as applicable) as part of any governance structure.
- The requirement to keep timely, consistent, and accurate records of participants’ algorithmic trading to facilitate appropriate levels of transparency and auditability.
- The need to ensure relevant personnel are appropriately trained to support algorithmic rading or to manage the trading system they operate. Such training should be tailored to the activity and role performed.
“The use of algorithmic trading systems across FICC markets has increased significantly in recent years and having robust governance structures in place to help manage the risks associated with this rise in algorithmic trading is critical,” says Ciara Quinlan, global head of principal electronic trading, FX, Rates and Credit at UBS and co-chair of the FMSN Working Group that produced the draft. “This Statement of Good Practice builds on the substantial work conducted by regulators in this space and should help further drive good governance practices particularly in less regulated asset classes and markets.”
Chris Dickens, chief operating officer EMEA, Global Markets at HSBC and Quinlan’s co-chair, adds, “This Statement of Good Practice seeks to promote good conduct and governance practices applicable to algorithmic trading activities and demonstrates the shared commitment of market participants to enhancing the integrity and functioning of FICC markets.”