UK Authorities Call for Improved DvP Risk Controls

A joint letter from the UK’s Prudential Regulatory Authority (PRA) and Financial Conduct Authority has called for enhancements to the monitoring and mitigation of counterparty credit risks in relation to delivery versus payment (DvP) clients.

The letter shares observations on good practices and follows what the authorities term a number of incidents involving defaults by clients who trade cash products solely on a DvP basis. These defaults typically happened during periods of high price volatility, and in some cases, led to material losses at firms, they add.

In late February and early March 2020, the highly liquid US Treasuries markets experienced high price volatility leading to implications for counterparty risk management practices, the letter states, leading to the PRA and FCA reviewing the risk controls and arrangements related to DvP Clients.

The letter lays out recommended best practices for the on-boarding of DvP clients, as well as the credit risk framework and ongoing monitoring of client activity.

The letter, which can be read here, says, “We encourage firms to consider fully the above-mentioned practices, with a view to incorporating them in your risk management of DvP Clients. We also encourage firms to consider any associated conduct risk issues while implementing measures related to above-mentioned areas.”

The PRA and FCA are requesting an update from chief risk officers outlining what steps they have taken on the back of the letter by the end of Q4 2021, through the usual supervisory channels.

The letter concludes, “We will continue to maintain a strong focus on significant loss events in the market and expect firms to conduct risk management reviews within their own organisations as such events occur.”