Financial Markets Standards Board (FMSB) today launches its final Statement of Good Practice for the application of a model risk management framework to electronic trading algorithms.
Sophisticated modelling techniques used for calculating trading risk and required capital came under significant global regulatory scrutiny following the financial crisis as a result of their acutely revealed shortcomings in containing risk. Regulatory guidance seeking to address the possible adverse consequences of decisions based on incorrect or misused models followed. This guidance applies to all model types including the use of models in algorithmic trading. However, the degree of model risk and the potential magnitude of any adverse consequences varies significantly across model types.
The purpose of the SoGP is therefore to support firms in applying model risk management frameworks in a proportionate and tailored manner to models deployed in their electronic trading algorithms (‘Algos’).
The focus of the guidance is in areas where market practitioners, including “first line” risk owners and “second line” risk managers, have identified that the nature of model use in Algos merits a differentiated approach compared with other model types.
This industry-developed good practice supplements existing broader supervisory guidance.
Myles McGuinness, CEO of FMSB, said:
“We would like to thank our Members for this work addressing how to apply model risk management frameworks to electronic trading algorithms. It is important that the industry comes together to make sure that good practice in a complex area such as this is set out in a way that can be well understood and easily applied, including practical examples.”
Ciara Quinlan, Global Head of Principal Electronic Trading, FX, Rates and Credit at UBS, who led the Working Group said:
“I am pleased that FMSB is able to publish the final Statement of Good Practice for the application of a model risk management framework to electronic trading algorithms. Harnessing expertise across the industry via FMSB to create guidance of this sort is immensely valuable and I hope what we have set out today will help to support all those across the industry working in this space, as well ultimately improving market effectiveness and confidence.”
For more information:
Laura Conaghan
+44 (0)7929 72669
Laura.conaghan@fmsb.com