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Dear CEO | Release Date: 10th December 2021

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

To access the original FCA document, click here.

Short Summary

The Financial Conduct Authority (FCA) has issued a supervisory review focusing on the default of Archegos Capital Management, which resulted in over $10 billion in losses across multiple firms in March 2021. This event has prompted a critical examination by both the Prudential Regulation Authority (PRA) and the FCA, highlighting significant deficiencies in the equity finance businesses of firms involved with Archegos. Key areas of concern include business strategy, client onboarding, financial risk management, and procedures for liquidation and close-out.

The review identified a lack of comprehensive risk management across business units, insufficient ongoing evaluation of client relationships, inconsistent margining practices, and inadequate limit frameworks. It was noted that these issues are recurrent, reflecting a deeper systemic failure to implement lessons from past financial crises, such as the Global Financial Crisis of 2008. This is attributed to a risk culture where front-line business executives neglect risk ownership, the independent risk function is undermined, and senior management incentives do not align with safe and sustainable outcomes.

In response to these findings, the FCA and PRA expect firms to undertake a thorough review of their equity finance operations against the deficiencies outlined. This includes assessing risk management practices and controls, considering these themes across all sales and trading activities, and addressing broader issues of risk culture. Firms must report their findings and remediation plans to the regulatory bodies by the end of Q1 2022.

Key take-away:

Firms must conduct a systematic evaluation of their equity finance and prime brokerage activities, ensuring that risk management frameworks are robust and that senior management fosters a culture that prioritises comprehensive risk oversight. The review should extend to all areas of secured and synthetic financing activities, with progress influencing senior executive remuneration.

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