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
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