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FCA’s multi-firm review of liquidity risk management at wholesale trading firms: key takeaways for MIFIDPRU firms

As part of a broader communication process with firms on liquidity risk management, the Financial Conduct Authority (FCA) has now released its key findings from a multi-firm review focusing on liquidity risk management (2025 Liquidity Multi-Firm Review findings) at twenty-six of the largest wholesale trading (sell side) firms, particularly brokers, in scope of the Investment Firms Prudential Regime (IFPR). This paper follows on from FCA’s earlier Dear CEO letters to sell side firms (January 2023 and January 2025), FCA’s supervisory strategy for principal trading firms (August 2023), and FCA’s wholesale banks portfolio analysis and strategy (September 2023).

Against a backdrop of a series of market stresses over recent years, this review has highlighted both areas requiring significant improvement within the sector and guidance and examples of best practice. The FCA has noted that many firms, had weaknesses in their stress testing frameworks, leaving them vulnerable to liquidity shocks.

All firms subject to IFPR should consider the adequacy of their governance and liquidity risk management framework arrangement relative to areas set out in this latest FCA publication, where these may be applicable. Sell-side wholesale firms should particularly evaluate their frameworks in light of specific points raised by the FCA in this publication.

Embedding a robust liquidity risk management culture remains a priority


A strong risk management culture and robust governance framework are fundamental to effective liquidity risk management. As we noted in our earlier blog on FCA's concluding IFPR implementation observations, assessment of liquidity requirements is an area that the FCA has identified as requiring further enhancement for many firms. The 2025 Liquidity Multi-Firm Review findings revealed that many firms struggle to translate well-designed liquidity risk management frameworks into robust and embedded processes. Often, frameworks remained reliant on the ongoing sponsorship of a few senior individuals rather than being embedded as a fundamental part of a strong risk management culture, potentially contributing to vulnerabilities.

The FCA has helpfully provided some examples of good practice when firms design their governance and risk framework including:

  • Identifying and quantifying inherent forecasted intraday risk exposures on a daily basis, and monitoring residual forecasted intraday and inter-day risk exposures to ensure that they remain within the risk tolerances defined by the risk appetite framework.
  • Defining a clear qualitative and quantitative risk appetite framework, including setting of specific limits and action triggers. Good practice also includes consideration of non-financial criteria when defining the risk appetite, for example system outages, reconciliation failures, etc.
  • Implementing continuous improvement mechanisms for regularly reviewing and updating the liquidity risk management framework, and ensuring a holistic approach with other risks, to ensure that it remains fit-for-purpose and adapts to evolving risks.

Stress testing framework continues to receive regulatory scrutiny


As we explored in our previous blog on Liquidity risk management in wholesale brokers, stress testing remains an area of challenge, as many firms continue to struggle to build building a strong stress testing framework and to demonstrate proactively that they are prepared for a range of potential liquidity stresses. The FCA has highlighted the risks arising from firms relying on infrequent and unrealistic stress testing, leaving them unequipped to handle the timing and magnitude of actual and potential liquidity stresses. Further, the FCA has noted that poor practice included firms underestimating the scale and magnitude of liquidity outflows, while overestimating the timing and availability of liquidity inflows, as well as failure to calibrate value-at-risk (VAR) models to enable an accurate forecast of the material liquidity outflows. This disconnect underscores the need for more dynamic stress testing that reflects the current market environment and the instantaneous nature of liquidity stresses. The FCA has also provided other areas of poor practice including the failure to incorporate a range of idiosyncratic stress scenarios and not considering implicit credit exposures and use of liquidity.

The FCA has indicated a range of good practice examples, including:

  • Dynamic liquidity assessment for these firms, including frequent (e.g. twice a day) forward-looking liquidity stress assessments, to allow proactive identification of the potential vulnerabilities.
  • Well considered stress assessments, incorporating operational inputs and behavioural analysis, covering clients, counterparties, and liquidity providers. The FCA has provided additional detail on steps firms should consider as part of these assessments.

For further considerations regarding the stress testing and risk appetite frameworks, please see our previous blog.

The importance of effective Contingency Funding Plans (CFPs) and Wind-Down Planning arrangements


The FCA review has highlighted the critical role of robust CFPs in navigating liquidity stresses. The review emphasised the importance of clearly defined quantitative triggers that, when breached, empower designated individuals with Board-approved authority to take timely action. Firms should consider these expectations along with the recovery planning requirements set out in MIFIDPRU 7.5.

The FCA has noted that some firms did not consider the full range of potential actions available to the business and also provided examples of good practice including frequently testing the operability of contingency actions. The FCA has also noted some illustrative contingency actions firms could consider, including:

  • Actions increasing liquidity:
    • Drawing-down from liquidity facilities
    • Temporarily increasing the size of liquidity facilities
    • Selling unencumbered inventory
    • Using sale and repurchase (repo) arrangements
  • Actions conserving liquidity:
    • Reducing trading limits
    • Reducing size limits for transactions in single-name securities/commodities
    • Using name give-up and exchange give-up of unsettled transactions
    • Having clients pre-fund large and/or illiquid transactions
    • Reducing the amount of credit provided to clients

The FCA has also identified some areas for firms to consider regarding their Wind-Down Plans (WDP). Their review noted the importance of identifying appropriate stressed scenarios through Reverse Stress Testing (RST) as well as ensuring firms can demonstrate operability of their WDPs by considering contingencies for activities that may require longer execution times when operating a wind-down under stress. Examples included considering the impact on notice periods from contractual arrangements or the impact of clients not being immediately contactable. Further the FCA has highlighted that firms should ensure an appropriate level of granularity when drafting WDP financial projections, for example, considering whether the firm’s business model requires daily or weekly granularity to account for material cash inflows and outflows, noting this may be particularly relevant at the beginning of the wind-down process. For further considerations regarding the WDP process, please see our previous blog.

Expected liquidity risk management capabilities


The FCA has outlined the importance of ensuring firms have experienced teams to support effective liquidity risk management. The FCA has stated that firms should seek to constantly update their expertise and knowledge, and upgrade their frameworks as the reality of their business changes. The review has also outlined that good practice includes utilising a holistic approach, such that firms understand the timing and magnitude of both under Business As Usual (BAU) and stressed cash inflows and outflows from its operating processes.

The FCA noted that:

  • Teams responsible for liquidity risk management should be adequately experienced to identify the liquidity risks arising from their business models.
  • In some instances, firms' operational processes were not designed to support operations teams, leading to an inability to identify when operations, processes or controls failed and limited the firm’s ability to communicate issues to treasury to take mitigating actions.
  • Firms should consider outsourcing arrangements (particularly where unregulated service entities are involved) to ensure the liquidity and funding risks are identified and proactively monitored and managed. Where relevant these risks should be considered in Internal Capital and Risk Assessment (ICARA) process.

Data quality remains a concern


The FCA has again emphasised the reliance of prudential planning and supervision on accurate regulatory data. The submission of inaccurate or incomplete data could impact on the effectiveness of supervisory responses. Firms should therefore ensure that they prioritise data quality and implement robust data governance frameworks, to ensure the accuracy and completeness of their regulatory data submissions.

Conclusion and next steps


The FCA's review serves as a timely reminder of the critical importance of robust liquidity risk management for the stability and resilience of both individual firms and the wider financial system. Firms should view the FCA’s findings as an opportunity to assess their current practices, identify areas for improvement, and adopt the outlined good practices (where relevant) in order to enhance their resilience to liquidity risks.

Conducting an assessment of approaches used to manage liquidity risk can help to support Senior Management Function (SMF) holders and Boards discharge their regulatory responsibilities in reviewing and approving the adequacy of liquidity risk framework.

If you would like to discuss any of the areas above in further detail or require any further support on prudential risk management, governance or other areas, please do not hesitate to contact any author of this blog.