The FCA’s Focus on Liquidity Risk in Wholesale Markets: CFP, Stress Testing, and ICARA

This article is part of a series examining the key themes from the FCA’s Regulatory Priorities, Wholesale Markets report. The report sets out the regulator’s view of the risks, opportunities and priorities shaping their approach in the year ahead for brokers, exchanges, benchmark providers and other firms in this space.

The FCA is continuing in 2026 the emphasis on liquidity arrangements within Wholesale firms that we saw last year. 2025 saw the publication of results from the FCA’s ‘Multi-firm review of liquidity risk management at wholesale trading firms’. The recent Regulatory Priorities, Wholesale Markets report flags this focus will continue, with clearing brokers of particular interest to this supervisory venture. Having promised further multi-firm reviews of wholesale brokers, the FCA has further cautioned that additional capital and liquidity requirements will be imposed as needed.

The Wholesale Markets report makes clear that the ICARA and Contingency Funding Plan will be of primary interest to FCA supervisory work. Firms will also need to demonstrate broader strengths in risk management and governance. Ultimately, with the FCA essentially showing us the exam paper, firms should begin to respond with a proper critique of their liquidity arrangements.

The Pillars of a Compliant Framework

ICARA: Integrating Capital and Liquidity Risk

The Internal Capital Adequacy and Risk Assessment (ICARA) should document how you assess and maintain adequate liquidity relative to your risk profile. The ICARA should embed forward-looking risk management into the firm’s capital and liquidity governance.

Stress Testing and Scenario Analysis

With the FCA emphasising stress testing as key to evaluating a firm’s resilience to liquidity shocks, your stress testing should flow from your ICARA, involving severe but plausible scenarios that are relevant to your business. The chosen scenarios should enable you to test whether your liquidity buffers and funding strategies are sufficient. Crucially, liquidity events can happen quickly, so appropriate consideration of T0, T1, and T2 events is critical. Home in on particular sources of funding in your analysis e.g., consider use of TTCA closely because these balances are often stable in the ordinary course of business but fall quickly in times of stress.

Contingency Funding Plans (CFPs)

Your CFP should enable you to respond effectively to liquidity stress events while maintaining business continuity and protecting clients. The plan should come from your stress testing and should be demonstrably capable of weathering the aforementioned ‘severe but plausible’ scenarios. The funding lines you would draw on in a stress scenario should also be tested regularly to give assurance that they will be available when needed – you do not want to be live testing for the first time as an event materialises.

FCA Supervisory Drivers

When reviewing or redesigning your liquidity framework, keep at the forefront of your work the key FCA concerns, namely:

• Interconnectedness: Stress in one institution can spread across the financial system. Firms should understand the risk they pose to other firms and to markets more broadly, demonstrating to the FCA that their efforts are not just inward looking, considering also the health of their counterparties.

• Funding Mismatches: Reliance on short-term funding for long-term assets increases vulnerability during stress. Firms should have a handle on their balance sheet, aligning the positions on their book with suitable funding to prevent instances where risk staying on the book longer than planned causes serious harm through excess financing fees.

• Market Fragility: Even highly liquid instruments can become illiquid under extreme conditions. Consider your ability to withstand periods of excessive risk on your book where market conditions prevent its offloading. Indeed, determine how well prepared you are for counterparties walking away, leaving you with unmatched positions.

What to expect

The FCA is adopting a proactive approach to liquidity risk, with the ICARA and the CFP the focus of their scrutiny. Firms can expect FCA scrutiny to include:

• Framework Review: An assessment of your broader liquidity framework, considering your stress testing, your CFP, and your ICARA.
• Stress Deep Dive: An evaluation of whether your stress scenarios are severe, plausible, and reflective of market dynamics.  
• CFP: A review of tests you have run for your CFP, considering areas identified for improvement.
• Embedded Risk Culture: An assessment as to whether liquidity and capital risk management is fully integrated into governance and operations. Remember, your operations team might be closer to the day-to-day reality of your firm’s liquidity than most others.
• Forward-Looking Measures: A review of the extent to which your firm anticipates emerging liquidity risks and adapts its ICARA and CFP accordingly.

How Ocorian can help

We can support with a review or redesign of your liquidity framework. We can also provide SME advice on specific complex cases and support with regulatory liaisons in instances of proactive supervision or enforcement.

The FCA’s combined focus on Contingency Funding Plans, Stress Testing, and ICARA poses a challenge for many firms. Our integrated approach to liquidity risk takes into account regulatory expectations and we would encourage you to contact us before any challenges or visits from the FCA.