20 June 2003

UNICE Position Paper on ISD

UNICE released a position paper on the forthcoming Investment Services Directive underlining the need of an adequate regulatory framework that promotes best execution of orders and transparency. However, some UNICE members are concerned that insufficiently regulated competition may lead to the fragmentation of liquidity. To ensure better transparency of markets, UNICE agrees that post-trade reporting should take place promptly.

Imposing a suitability test for execution-only trading services is regarded as not appropriate. There are differing views among UNICE members concerning what should replace the proposed abolition of the concentration rule.

There are different views within UNICE as to whether this is appropriate and on how MTFs should be treated. However, UNICE members believe that both regulated markets and MTFs should be able to benefit from the presumption of best execution. Not all rules that are adequate for the regulation of regulated markets may be suitable for alternative order execution venues with different market models and cost structures.

There are also divisions over the issue of pre-trade transparency. While some members stress the importance of transparent information on price offers for the quality of price formation, other members are of the opinion that too much transparency can harm market quality in that it deters potential participants from entering the market.

However, UNICE argues that on best-execution the directive does not clarify how, for example, variables other than price such as speed of execution and overall trading costs would be taken into account. Retail clients and institutional investors may have different expectations as regards “best execution”. Detailed pre-defined criteria for best execution, however, may be counterproductive. Furthermore, firms should be allowed to agree in a contract with the investors the venues which will be taken into account for application of the best-execution rule.

Position paper

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