FMSB issues new Statement of Good Practice on algo trading

The FICC Markets Standards Board (“FMSB”) has published a Transparency Draft of a new Statement of Good Practice on Algorithmic Trading in FICC Markets. The use of computer algorithms to facilitate trading in FICC markets has increased at a rapidly growing pace over recent years and has the potential to adversely impact market and firm stability and to harm clients. This new Statement of Good Practice sets out a number of core statements of good practice related to the use of algorithms in firms’ FICC businesses.

FMSB issues new Statement of Good Practice on algo trading
Mark Yallop

Extending the coverage

In certain jurisdictions, significant new regulation – in particular MiFID II – has been introduced to cover this area. However, there are certain types of FICC related activity which are not subject to MiFID, such as trading of spot FX and physical commodities not on a MiFID regulated venue, and this Statement of Good Practice is intended to apply to the use of algorithms in all FICC businesses, including those not covered by MiFID.

Core principles

The Statement sets out a number of core principles, which are designed to ensure appropriate behaviour and governance in relation to algorithmic trading or the operation of a venue involving an algorithmic trading system. The statements of good practice include that firms engaged in algorithmic trading should:

  • Put in place adequate and effective structures and mechanisms to provide for appropriate oversight, supervision and controls.
  • Have appropriate pre- and post-trade controls in operation in relation to algorithmic trading.
  • Have a formal risk management function independent of the front office to determine appropriate levels for pre-trade risk controls as well as to monitor the financial exposure and non-financial risks associated with algorithmic trading.
  • Consider formalising a specific risk appetite for their algorithmic trading activity.

Mark Yallop, Chair of FMSB said: “The use of algorithmic trading systems has increased enormously over recent years, yet some of these systems lie outside of the reach of current regulatory oversight such as that of MiFID II. The statements of good practice that we set out today are designed to apply to all firms engaged in algorithmic trading practices, including those operating in areas untouched by regulation. We are doing this because we believe this will enhance the stability of markets in the longer term and tackle a growing area which, if left untouched, could become the source of potential market conduct risk and instability”.FMSB members and other interested parties were invited to comment on the proposed Statement of Good Practice and FMSB will be issuing the final document in due course. This is the twelfth Standard or Statement of Good Practice (including those in their consultation period) to have been published by FMSB since it was set up in 2015 in response to the Fair and Effective Markets Review in the UK with a mandate to improve conduct and raise standards in the wholesale Fixed Income, Commodity and Currency markets. All materials published by FMSB are available at www.fmsb.com