HKMA Issues Risk Management Practices for Algorithmic Trading by Banks
HKMA published sound practices on the management of risks associated with algorithmic trading by the authorized institutions. These practices are based on the results of an HKMA survey from 2018 and a round of thematic onsite examinations conducted in 2019. The survey on algorithmic trading suggested that algorithmic trading may become more prevalent in the banking industry. Thus, HKMA considers it useful to set out its supervisory expectations around algorithmic trading and share the sound practices observed during the thematic examinations with all authorized institutions.
Authorized institutions engaged in algorithmic trading activities are expected to give due consideration to these supervisory expectations and sound practices when developing their risk management framework, having regard to the nature, scale, and complexity of their algorithmic trading activities. Some of these sound practices have been adopted by the more advanced institutions, as observed by HKMA in the thematic examinations. Seven authorized institutions, mainly international banks using algorithms for making investment decisions, were covered in the thematic examinations. The objective of the examinations was to assess the adequacy and effectiveness of the risk management practices of authorized institutions in relation to algorithmic trading activities, including governance and oversight, development and testing of algorithms, and risk monitoring and controls. The sound practices set out by HKMA cover the following areas:
- Proper governance and risk management frameworks, effective and independent control function, regular reviews of algorithms and relevant governance and controls, and regular internal audit reviews
- Effective framework governing development and testing of algorithms and robust algorithm approval policy and procedures
- Comprehensive and prudent pre-trade controls, robust post-trade controls, proper kill functionality to suspend trading, effective business continuity arrangements, adequate controls on access rights, and robust incident-handling policy and procedures
- Proper documentation for audit trials and comprehensive inventory of algorithms
Keywords: Asia Pacific, Hong Kong, Banking, Securities, Algorithmic Trading, Governance, Sound Practices, Fintech, Artificial Intelligence, HKMA
Previous Article
GLEIF Updates Information on Global Regulatory Use of LEIRelated Articles
APRA Sets LAC for D-SIBs, Proposes to Enhance Crisis Preparedness
APRA issued a letter on the loss-absorbing capacity (LAC) requirements for domestic systemically important banks (D-SIBs) and published a discussion paper, along with the proposed the prudential standards on financial contingency planning (CPS 190) and resolution planning (CPS 900).
EC to Review Macro-Prudential Rules while ESRB Assesses Policy Stance
The European Commission (EC) launched a call for evidence, until March 18, 2022, as part of a comprehensive review of the macro-prudential rules for the banking sector under the Capital Requirements Regulation (CRR) and Directive (CRD IV).
FSB Sets Out Good Practices for Crisis Management Groups
The Financial Stability Board (FSB) published a report that sets out good practices for crisis management groups.
APRA Penalizes Heritage Bank for Incorrect Reporting of Capital
The Australian Prudential Regulation Authority (APRA) found that Heritage Bank Limited had incorrectly reported capital because of weaknesses in operational risk and compliance frameworks, although the bank did not breach minimum prudential capital ratios at any point and remains well-capitalized.
OSFI Releases Annual Report 2021-2022
The Office of the Superintendent of Financial Institutions (OSFI) released the annual report for 2020-2021.
OSFI Updates Timeline for Implementation of Certain Basel Rules
Through a letter addressed to the banking sector entities, the Office of the Superintendent of Financial Institutions (OSFI) announced deferral of the domestic implementation of the final Basel III reforms from the first to the second quarter of 2023.
EC Defers Adoption of Regulatory Standards for Disclosures Under SFDR
EIOPA recently published a letter in which EC is informing the European Parliament and Council that it could not adopt the set of draft regulatory technical standards for disclosures under the Sustainable Finance Disclosure Regulation (SFDR) within the stipulated three-month period, given their length and technical detail.
FCA Releases MIFIDPRU Application Forms and Third Set of Rules on IFPR
The Financial Conduct Authority (FCA) published the third in a series of policy statements that set out rules to introduce the UK Investment Firm Prudential Regime (IFPR), which will take effect on January 01, 2022.
APRA Finalizes Capital Adequacy Standards for Banks
The Australian Prudential Regulation Authority (APRA) published, along with a summary of its response to the consultation feedback, an information paper that summarizes the finalized capital framework that is in line with the internationally agreed Basel III requirements for banks.
CPMI-IOSCO Seek Comments on Access to Central Clearing and Portability
The Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) issued a consultative report focusing on access to central counterparty (CCP) clearing and client-position portability.
