By placing stronger requirements on best execution, MiFID II is transforming the execution landscape, writes Carlo Svaluto.
The wording concerning best execution in the most recent update to the European Union’s Markets in Financial Instruments Derivatives directive (MiFID II) is a case in point. In the original 2007 text, the directive required firms to take “all reasonable steps” for achieving best execution. Under the version of the rules that came into effect in January 2018, firms are to take “all sufficient steps”.
The slight change in terminology has raised the bar for asset managers. Best execution is still determined by the factors that were relevant in the previous regime, such as price, speed, size and likelihood of execution and settlement. However, asset managers have had to strengthen their best execution policies and assume more responsibility for this aspect of their service.
Under the new regime, firms on both sides of the market must provide more detailed reporting. Asset managers must publish an annual report, known as RTS 28, which shows the top five execution venues they have used. The report must include detailed information on the quality of execution they have achieved. This data has to be reported separately for 22 categories of financial instruments. Separate reporting for professional and retail clients is also required. Providers of execution services, on their part, must publish a quarterly report (RTS 27) on the quality of execution they have provided.
The renewed emphasis on best execution is one example how MiFID II has brought disruption. The market has already seen several quarterly RTS 27 reports by execution venues, but asset managers have only released one RTS 28 report, covering 2017. The latter did not reflect best execution under MiFID II, therefore the upcoming RTS 28 reports, due in May, will offer fresh evidence of how the new regulation is changing the best execution business.
The regulator said it would continue to look at best execution “to see what steps investment management firms have taken to assess gaps in their approach to achieving best execution and how they can evidence that funds and client portfolios are not paying too much for execution.” It added it would pursue actions if firms were found wanting.
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