If you are in senior management of a regulated investment management firm (like Sapphire), your firm's liquidity is never far from your mind. We are very much aware that liquidity risk remains one of the most significant threats to the stability of UK wholesale trading firms.
In a recent discussion hosted by the compliance firm Ocorian, senior regulators from the Financial Conduct Authority ("FCA") shared their findings from a major review into liquidity risk management. The conversation provided valuable insights into what the FCA expects from firms and what constitutes good practice, with the speakers illustrating their points through real-world anecdotes of stress events and firm failures.
Beyond Compliance: Focus on Practicality
The FCA’s message was clear: firms must move beyond a box-ticking exercise. It is not enough to simply comply with a “thin set of rules.” The priority is practical capability, whether a firm can genuinely survive a severe but plausible stress event. The starting point is assessing critical liquidity risks, evaluating controls, and applying robust stress tests (Assessment A). Firms must also calculate the liquidity needed for an orderly wind-down (Assessment B) and hold at least the higher of the two results as their threshold requirement.
As one FCA speaker put it: “There’s no point in a review if the firm falls over the next day,” and the challenge to firms was clear: would senior managers feel confident that their liquidity framework would keep the business standing, and them still in a job, after a severe but plausible stress?
This shift emphasises resilience over mere compliance, a point particularly important given the systemic importance of many wholesale firms.
Why Wholesale Firms Matter
Wholesale trading firms sit at the heart of the UK’s financial markets, trading products that directly affect gilts, energy markets, and metals. Their failure would have far-reaching consequences, potentially triggering contagion across the financial system. The FCA's review was therefore focused on the largest 26 firms in this space, including commodity clearing brokers, proprietary trading firms, and inter-dealer brokers, with findings that also offer lessons for smaller firms and other regulated entities.
The FCA’s Key Concerns
The review identified several scenarios that frequently cause liquidity stress:
Perhaps most importantly, firms must recognise that liquidity risk is about gross flows, not net. It is no comfort to be “net flat” if cash is required at 9 a.m. but only arrives in the afternoon.
Jackie Domanska, a Principal Consultant with Ocorian, emphasised the point that firms cannot ignore liquidity risk:
“We often see firms ignoring liquidity risk, especially fund managers, because they assume they have predictable cash flows. However, recent events, such as the collapse of Silicon Valley Bank or system issues with UK banks, mean there are times when firms and clients don’t have access to their bank accounts, and this can create liquidity stresses. Firms need to think about what they would do when they experience these kinds of issues, especially when key people in the firm may be on leave and there is no contingency plan in place.
The FCA’s recent feedback gives excellent practical advice, and many of the points apply to all firms.”
Principal Consultant, Ocorian
Governance, Escalation, and Operational Readiness
The FCA’s review went beyond numbers, examining governance arrangements, board oversight, escalation processes, and operational plumbing. The regulator expects firms to have clear escalation triggers, robust governance forums, and a joined-up understanding between finance, risk, and operations teams. As one speaker noted, operational settlement processes are often treated as “boring” and ignored, until they fail, triggering real world liquidity crises.
Firms that impressed the FCA were those that monitored liquidity daily (T0 and T1), stress-tested for the first critical three days of a crisis, and had pre-approved communication plans to get ahead of negative news. This proactive approach helped avoid panic and protect client confidence. As one FCA speaker put it, best practice is to assume the worst will happen, because it already has. The strongest firms positioned themselves to get in front of bad news, rather than letting the market set the story for them.
Contingency Funding Plans: Non-Negotiable
One question raised was whether firms are really expected to have a separate contingency funding plan ("CFP"). The FCA’s answer was unambiguous: yes, even the smallest firms should have some form of plan, even if it is “written on the back of a post-it note.” The CFP is vital not just for regulatory compliance but also for personal liability protection. It gives formal board delegation for key actions during stress, ensuring senior managers can act swiftly and within their authority. Without this, decision-makers risk personal exposure and may freeze in a crisis.
The FCA stressed that CFPs must be living documents, not an appendix buried in page 376 of the ICARA. In practice, it needs to be a document that sits under the fingertips of those authorised to act, dusted off and rehearsed well before the crisis arrives.
Good Practice vs. Weaknesses
The FCA observed a spectrum of performance across firms:
Good practice:Where material gaps were identified, the FCA required firms to maintain additional liquidity until the issues were resolved, supported by CEO attestations and internal audit assurance.
The Core Message: Good Risk Management Protects Profitability
The FCA closed with a reminder that good liquidity risk management is not a regulatory burden — it is a profitability safeguard. Firms that cannot survive three days of stress cannot remain in business. The cost of holding extra liquidity or running stress scenarios pales in comparison to the cost of failure.
Next Steps:
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A copy of the slides presented during the presentation can be found here.
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