Prudential Regulation Authority Rulebook

1.1

This supervisory statement (SS) sets out the PRA’s expectations of a firm’s risk management and governance of algorithmic trading and should be read alongside: Commission Delegated Regulation (EU) 2017/565 on organisational requirements and operating conditions for investment firms¹ (if applicable); the General Organisational Requirements Part and Risk Control Part of the PRA Rulebook; European Securities and Markets Authority (ESMA) Guidelines on systems and controls in automated trading environment trading platforms;² Joint ESMA and European Banking Authority (EBA) Guidelines on the assessment of suitability of members of the management body and key function holders;³ and EBA Guidelines on internal governance.⁴

1.2

This SS applies to firms that engage in algorithmic trading⁵ and are subject to the rules in the Algorithmic Trading Part of the PRA Rulebook and Commission Delegated Regulation (EU) 2017/589.⁶ It also applies to all algorithmic trading activities of a firm including in respect of unregulated financial instruments such as spot foreign exchange (FX).

1.3

In setting these expectations, the PRA considers that a firm’s risk controls are critical to ensuring appropriate governance arrangements are in place when engaging in algorithmic trading. Such controls express the risk appetite of a firm’s governing body and include, for example, restrictions as to the types of security that can be traded and eligibility of counterparties.

1.4

The PRA sets 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.