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  "documentTitle": "Banking and capital markets trends 2020: Laying the foundations for growth",
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  "notes": "Focuses on the 'three lines of defence' model in the context of algorithmic trading compliance.",
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      "text": "Algorithmic trading",
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      "text": "Algorithmic and electronic trading is a key area of supervisory focus for regulators as there have been several high profile issues resulting in trading errors and the resulting substantial impact to markets.",
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      "text": "Internal audit testing needs to be aligned with the risks associated with the low touch and high technology nature of algorithmic and electronic trading. To do this, internal audit functions need to independently challenge the depth of first and second line governance, controls and risk management arrangements by combining core audit capabilities with advanced technical methodologies and tools. Areas of potential focus include: Is pricing accurate and does order routing and execution meet best execution requirements? Does quote, order generation and execution behaviour adversely impact clients and markets, and have relevant parameters and limitations of trading been fully and properly disclosed to clients? Are risk management and code change controls up-to-date with regulation and commensurate to the risk appetite of firms and the risks specific to firms' algorithms, strategies and systems? Do systems deliver latency performance, stability and resilience under stressed market conditions?",
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      "text": "Shortage of specialist regulatory, trading and high technology skills to identify risks specific to the algorithms, their trading strategies and systems, to perform adequate testing of algorithm behaviours, and to create appropriate governance and control frameworks. Lack of clarity on functional responsibility across the thee lines of defence which leads to gaps in the coverage and implementation of applicable regulation. Significant fines due to non-compliance with regulatory expectations.",
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      "text": "Algorithmic and electronic trading is a key area of supervisory focus for regulators as there have been several high profile issues resulting in trading errors and the resulting substantial impact to markets. Key risks associated with algorithmic and electronic trading such as programmatic function errors, inaccurate pricing, loss of exchange connectivity, and hard-coded market abuse, have drawn the attention of investors and clients, as well as regulators. This has created a need for significantly improved transparency around the potential behaviour of algorithms, their strategies and systems. The governance, controls and risk management of algorithmic and electronic trading is under much greater scrutiny.",
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      "text": "Regulation in this space covers the all three lines of defence. For example, MiFID II has a specific requirement for internal audit to review the annual management self-assessment validation report of algorithmic and electronic trading. The deadline for the first annual self-assessment was January 2019. Regulators expect a comprehensive assessment of the potential impact of algorithms to clients and markets, as well as the governance, controls and risk management arrangements across the three lines of defence. Many firms have developed multi-year plans to audit algorithmic and electronic trading. This reflects the low touch and high technology nature of firms' algorithmic and electronic trading environments.",
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