In a broadscale review of trading books, the Bank of England's (BoE) Prudential Regulation Authority (PRA) has revealed that it will assess whether the current controls around trading are "fit for purpose."
Speaking to the Financial Times online, Andrew Bailey, Chief Executive of the PRA said the PRA will scrutinise "governance and controls around the introduction and maintenance of trading algorithms, and the potential system-wide impact of crowded positions and market liquidity."
Attention has heightened around High-Frequency Trading (HFT) following the arrest of Navinder Singh Sarao, dubbed the 'Hound of Hounslow', who is currently fighting extradition to the US where he is being indicted for allegedly contributing to the US stock market 'Flash Crash' five years ago.
Asset managers are coming under increasing scrutiny in many countries; the Financial Stability Board in Basel will soon reveal plans for how to decide whether asset managers should be judged "systematically important" and, consequently, subject to tighter supervision and capital requirements.
One question the PRA is asking concerns whether asset managers should hold bigger cash buffers or easily tradable government debt in case they need to sell substantial holdings of securities.
Andrew Bailey also outlined potential responses as the requiring of funds "to hold larger liquid asset buffers to facilitate orderly redemption payments to investors, to apply more stringent leverage limits where appropriate, and to require that the redemption terms offered to investors take sufficient account of the risk that secondary market liquidity in the asserts they hold could be impaired."