FCA publishes review of liquidity risk management at wholesale trading firms

The UK Financial Conduct Authority (FCA) has published observations on good and poor liquidity risk management practices from its multi-firm review of wholesale trading (sell-side) firms in scope of the Investment Firms Prudential Regime (IFPR). In recent years, market stress events such as the COVID pandemic, the Russia-Ukraine war, the nickel price spike and the collapse of Credit Suisse and Silicon Valley Bank have prompted liquidity shocks for some firms. The FCA has, since 2023, written to sell-side firms on multiple occasions on the subject of liquidity risk management, noting that some firms were failing to develop their own competence in the area and advising on actions firms should be taking to manage liquidity risk.

The FCA's multi-firm review covered larger sell-side firms that are prudentially supervised by the FCA and compared their approaches on liquidity risk management. The FCA has set out examples of good and poor practices in a range of areas including governance and risk culture, stress preparedness, contingency funding plans and wind-down plans, and liquidity risk management capabilities. In general, the FCA found that many firms had appropriate and proportionate approaches, but some firms were weaker with approaches not proportionate to their size and the instantaneous nature of their liquidity risks. Following its review, the FCA took action against some firms and has confirmed it will continue to give feedback and use other regulatory tools where it finds firms are not properly managing liquidity risks. Firms are encouraged to use the good and poor practices identified in the review to improve their liquidity risk management capabilities. The FCA also plans to organise workshops and roundtables to share its observations.

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