Dear Chief Executive | Release Date: 4th August 2023

To read a longer summary of this Dear Chief Executive letter, click here.

To access the original FCA document, click here.

Short Summary

The Financial Conduct Authority (FCA) has issued a strategic supervisory letter to Principal Trading Firms (PTFs), outlining its supervisory strategy and expectations for the next two years. The letter emphasises the vital role PTFs play in the liquidity and price formation of wholesale financial markets both in the UK and globally, particularly those engaging in high-frequency and algorithmic trading, including market making in commodity markets.

PTFs are recognised for their technological advancements that contribute to market efficiency and innovation. However, these activities come with heightened responsibilities, particularly under the current challenging macroeconomic conditions influenced by geopolitical tensions, Brexit, and the aftereffects of the COVID-19 pandemic.

The letter identifies market abuse, operational risks, financial resilience, and the impact of commodity market volatility as the main drivers of potential harm that could arise from PTF activities. These risks necessitate robust governance, risk management, and compliance controls. The FCA emphasises the need for effective algorithmic trading controls and financial resource management to mitigate these risks, especially during volatile market conditions.

Moreover, the FCA plans to focus on enhancing the operational resilience of PTFs to prevent disruptions caused by cyber-attacks and other technological failures. It also highlights the importance of firms being prepared for regulatory changes stemming from the Wholesale Markets Review and other reforms affecting financial markets.

Key Takeaways and Actions:

PTFs should thoroughly review and discuss the contents of the FCA’s letter, assess how the identified risks apply to their operations, and take appropriate action to enhance their risk management and compliance frameworks.

Firms are expected to engage actively with ongoing FCA consultations and reforms, such as those related to market transparency and commodity derivatives.

The FCA will continue to monitor the compliance of PTFs with the new regulatory frameworks and their preparedness for potential market disruptions, with a willingness to intervene where necessary to ensure market integrity and protection of financial system stability.

PTFs are urged to ensure their operational practices align with FCA expectations and to prepare for heightened scrutiny on their trading activities, especially those utilising advanced technologies like AI in algorithmic trading. The FCA expects CEOs to ensure their firms comply with these strategic directives and to maintain open communication with the regulator about their ongoing compliance efforts and any significant changes affecting their operations.