Best Execution insights
The 3rd of January 2018, the entry into force of MiFID II/MiFIR, is a date that many will remember in the Financial Industry, just like the UK Bing Bang (1986), or the introduction of the first ever adopted financial regulation, i.e. the Security Exchange Act of 1934. One subject matter has specifically crystallised most of the critics: Best Execution rules. All but very few have strongly pushed back on Best Execution related provisions, with the intention of watering down the new features, especially the ones related to increased transparency & investors protection. Framework While MiFID II did not materially amend the overarching obligation to obtain the best possible results on a consistent basis when executing client orders, it has set a higher bar for compliance, and introduced new reporting requirements. The new framework moved from a higher‑level set of rules to a more prescriptive one, with well‑defined organisational and reporting requirements. With MiFID II, firms have to strengthen their arrangements, such as front-office accountability, monitoring capabilities and appropriateness of their systems and controls. Additionally, where MiFID I required firms to establish and implement an order execution policy, MiFID II is now prescribing in details the mandatory contents of that policy. Reporting requirements MiFID II set of rules are specifically directed at increasing the transparency of the way firms organise their order execution arrangements. The new rules were constructed with the intention of facilitating clients scrutiny on the service provided, and compensate for information asymmetries between clients and services providers. In order to give effect to this, MiFID II has introduced two new reporting requirements: one for trading venues, SIs, market makers & liquidity providers (RTS 27), and the second one for investment firms executing (transmitting) client orders (RTS 28). (Please note that some firms, depending on the type of products traded, must produce both the RTS 27 & the RTS 28: SIs or certain liquidity providers). To do / Not to do
- Article 27(5) of MiFID II requires firms to include in their order execution policy in respect of each class of financial instruments, information on the different venues where the investment firm executes its client orders.
- Article 27(5) of MiFID II requires firms to provide their clients with appropriate information on their order execution policy.
- The elements listed in Article 66(3) are falling short of the contents a comprehensive policy should include: order execution monitoring, governance, internal arrangements & procedures, record keeping, training, monitoring of compliance with the policy, review & updates … etc. A policy needs also to be signed-off by Senior Management & approved by the Governing Body.
- The requirement on firms is to present that information in a way that can be easily understood by clients, which means that it has to be tailored to the firm’s client’s types. Internal policies & procedure formats are rarely drafted in such a way.
- Where providing the services of portfolio management or reception & transmission of orders, do firms need to obtain prior consent on their order execution policy?
- RTS 27 reporting for market makers and other liquidity providers