PRA and FCA Call for Better Delivery Versus Payment Risk Controls

The letter outlines the following good practices for risk management of Delivery versus Payment clients:

• Onboarding of new accounts. While Anti Money Laundering (AML) and Know Your Customer (KYC) checks are fundamental to the onboarding of Delivery versus Payment clients, firms also undertake more comprehensive measures to establish the bona fide identity of their clients. At a minimum, a risk-based policy framework, developed and overseen by a credit function independent of the front office, is implemented to ensure that at least the basic credit profile of every client is within the firm’s risk appetite. More extensive credit analysis and potential escalation within the framework is required for higher risk accounts, such as those which have no financial track record or audited financial statements. Additional consideration is given to the periodic refreshing of information, upon which this due diligence is based. At the account opening stage, the accountable salesperson or internal owner of the new account formally signs off on the trading strategy that the client will be expected to follow, including guidelines for the typical size, type, and frequency of transactions that the account would be expected to undertake.
• Credit Risk Framework. Every client account, regardless of whether it intends to transact on a Delivery versus Payment-only settlement basis, is subject to a pre-settlement credit exposure limit. At a minimum, individual credit exposure limits are derived from a risk-based matrix or hierarchy that is developed and owned by an independent credit function.
• Ongoing oversight of clients. There is a clear internal ownership of the client account, to enable consistent oversight of the client. A monitoring system is developed to assess the actual trading profile of the client as compared with its expected trading profile. Parameters are set such that any material deviation from the expected strategy is flagged and escalated to the salesperson, front office management, and an independent control function. Ongoing client monitoring also covers risks related to financial crime and money laundering.
• Client exposure monitoring. An automated monitoring system is established to reconcile pre-settlement exposures to risk limits for each client account, with appropriate in-built escalation procedures. Any exceptions to the pre-settlement credit limit process, including all limit exceptions, are systematically escalated to the independent credit function for approval. Settlement fail reports incorporate relevant details in relation to pre-settlement exposure. For individual clients, who transact on an electronic basis, in-built system triggers and trading halt parameters are established for aggregate open exposures that exceed preestablished risk limits. Market risk exposure on failed trades, which may increase considerably during high market volatility, is monitored closely. Appropriate close-out policies and procedures are established to minimize losses that may occur as a result of failed/unsettled trades.
• Escalation procedure. There is a robust trade fail management process with systematic and pre-defined escalation trigger points for individual client accounts, ensuring that the rapid escalation of fails to both the front office and independent control functions is achieved. The fails reporting is linked to the automated monitoring system that reconciles aggregate pre-settlement risk exposures to risk limits. The policies and procedures that govern the fail management process include consideration points for individual client accounts, including the imposition of trading restrictions or halts until the fail management issues have been resolved.

Related Links

• PRA Notification
• FCA News Release
• Letter on Risk Controls (PDF)

Keywords: Europe, UK, Banking, Good Practices, Counterparty Credit Risk, Credit Risk, Delivery Versus Payment, Client Onboarding, Internal Controls, Operational Risk, FCA, PRA