FCA liquidity risk management review identifies good and poor practices

On 10 March 2025 the FCA published the findings of a multi-firm review of liquidity risk management practices at wholesale brokers and other trading firms. The publication sets out the FCA’s views on good and poor practices for liquidity risk management, and contains detailed observations on a range of thematic issues.

The FCA notes that while the firms that were subject to this review are not globally systemic, a disorderly failure of one or more of these types of firms has the potential to amplify market wide shocks and could cause significant disruption.

What does this mean?

The FCA’s review took place following several market stress events, including the COVID pandemic, energy price volatility following heightened geopolitical tensions, and the 2022 nickel price spike. During those episodes, the FCA observed that firms experienced liquidity shocks arising from settlement of short positions, large margin calls, and delays between paying margin calls to central counterparties (CCPs) and receiving margin from clients. The FCA also observed that some firms had poor knowledge of clients’ business profiles and client concentration risks.

Key findings arising from the FCA’s review include:

Identifying liquidity risks: Some firms had not updated their liquidity risk assumptions in light of the episodes of market stress experienced in recent years. The FCA notes that some firms described such shocks as extreme even though previously observed volatility had reached similar or greater levels. The FCA found that firms with weaker approaches failed to identify the full range of liquidity risks they are exposed to, particularly idiosyncratic risks.
Liquidity stress testing: Firms with weaker stress testing approaches were vulnerable to severe market events, and moderate idiosyncratic events. Firms with well-functioning frameworks dynamically calculated their stressed liquidity requirements on a daily basis and were able to promptly identify the likely impact of a stress event and the actions required to mitigate any resulting risks.
Access to liquidity facilities: Some firms were over-reliant on having immediate access to liquidity facilities (e.g. via parent or other group companies, or third-party liquidity providers) to mitigate instantaneous liquidity requirements.
Contingency funding plans: Firms with weaker approaches had contingency funding plans (CFPs) that were not able to mitigate commonly identified liquidity stress scenarios in a timely manner. CFPs sometimes lacked action triggers, or a range of actions designed to mitigate liquidity stresses.

The FCA provides examples of good and poor practice across several core themes, including:
1. Governance and risk culture
Good practice	Poor practice
Having a clearly defined qualitative and quantitative risk appetite. Regularly reviewing liquidity management frameworks to ensure they remain fit-for-purpose. Having a holistic approach to risk management and a culture of managing risks to optimise longer term performance and resilience.	Having frameworks that are not properly embedded and part of a strong risk management culture. Irregularly assessing the appropriateness of a firm’s CCP membership category.
2. Stress preparedness
Good practice	Poor practice
Frequent intra-day liquidity stress assessments. Ensuring stress models include a broad range of inputs and model peak potential outflows. Identifying and taking actions to minimise potential impacts arising from the unavailability of liquidity facilities. Having inventory in place to manage large open positions.	Mismatches between the frequency of stress testing and the instantaneous nature of liquidity stresses. Underestimating the number, timing and magnitude of potential margin calls and other outflows, based on historical exposures. Poorly calibrated value-at-risk models and lookback-period calculations. Relying on less stable funding sources. Failing to model and consider the behaviours of clients, counterparties and liquidity providers, including parent or other group companies, in an idiosyncratic liquidity stress. Inadequate consideration of emerging risks.
3. CFPs and wind-down plans (WDPs)
Good practice	Poor practice
Having CFPs with clearly defined quantitative action triggers and actions that are appropriate to the firm in question. Consideration in WDPs of the outputs of reverse stress testing and ensuring WDPs are operable in a stressed environment. Inclusion in WDPs of projected project and loss, balance sheet and cashflow statements at appropriate levels of granularity.	Having inoperable CFPs. CFPs with no quantitative action triggers. Failing to consider the full range of actions available.
4. Liquidity risk management capabilities
Good practice	Poor practice
Ensuring a holistic approach to liquidity risk management. Having teams with up-to-date expertise, frameworks and processes.	Teams lacking expertise in a firm’s inherent liquidity risks and operational processes. Weak understanding of outsourcing arrangements. Having narrow frameworks designed for meeting regulatory requirements, rather than being fit-for-purpose in line with sound liquidity risk management practices.

The FCA's publication provides a range of good-practice actions that firms could take under each of these thematic areas, providing indicative expectations for effective liquidity risk management. The FCA highlights that the findings and good practices contained in this review do not amend or replace any existing rules, for example the prudential requirements for investment firms as set out in the Prudential sourcebook for MiFID firms (MiFIDPRU) in the FCA’s handbook.

What do firms need to do?

Review and assess against each thematic area to identify any gaps.

Consider enhancements to stress testing frameworks.

Test the practicality of assumptions in CFPs.

The findings of the FCA’s multi-firm review should be read in conjunction with two previous publications, released in February and November 2023, on firms’ progress in implementing the Investment Firms Prudential Regime (IFPR).

The latest publication underlines the FCA’s expectation of firms to adopt holistic liquidity risk management frameworks and to invest sufficiently in the resources - both human and technological - to monitor and manage their liquidity risks at a sufficiently granular level. Such activities should be in line with the nature of the liquidity risks to which firms are exposed. For some firms, realising the commercial benefit of good liquidity risk management may require a step change in investment beyond what is required simply to monitor and manage compliance with regulatory requirements.

Firms that are in scope of the topics covered in the review should produce a gap analysis to compare the FCA’s expectations to their current practices to identify any areas for improvement.

In particular, firms should consider the FCA’s findings on good and poor practices related to stress testing and consider whether their current frameworks are calibrated to effectively mitigate the liquidity risks they are exposed to. Firms should also consider their frameworks in light of the Financial Stability Board’s recent report on liquidity preparedness for margin and collateral calls, which the FCA highlights in its publication.

While there is no explicit requirement under MIFIDPRU rules for investment firms to produce a CFP, firms may wish to reflect on the FCA’s observations on CFPs and WDPs, and consider implementing enhancements to their frameworks if needed. Firms should ensure their CFPs and WDPs include clear roles and responsibilities to support prompt plan execution.

Next steps

The FCA’s 2025 wholesale brokers supervisory priorities letter confirmed that the regulator will conduct further work to assess whether brokers’ CFPs and frameworks are adequate for responding to liquidity strains caused by stress events.

The FCA is also due to consult on aspects of its MiFIDPRU sourcebook, that sets the prudential rules for investment firms in the UK, in the first quarter of 2025.