Are you complying with the Best Execution obligations?
After a series of inspections held by the Cyprus Securities and Exchange Commission (CySEC), the regulator published Circular C343 sharing its review on compliance related to the Best Execution obligations of Investment Firms. The primary purpose of the review conducted by CySEC, was to assess whether the Cyprus Investment Firms (CIFs) have adequate procedures and processes in place to deliver the best possible result when executing client orders. Establishing good procedures and processes, means building solid foundations from best practices, which allows the firm to be best execution compliant, ready for a best execution inspection from the regulator at any time and protect the brand reputation of the Company from complaints, warnings or fines.
In articles published in January 2019, the SALVUS team specialized on best execution and risk management, discussed the best execution responsibilities of investment firms and provided insights on what would be needed from you in a best execution inspection. In this commentary, we will analyze the outcome of the CySEC review and provide further insights for you to ensure compliance in order to get you prepared for the next round of on-site inspections.
We have ensured compliance with the Best Execution requirements and have been inspected successfully by the regulator. Our team has been engaged in designing and implementing in-house monitoring programs for Investment Firms, in training the relevant departments of the Company on how orders should be handled, and in preparing them for a potential inspection by the regulator. It is important for us to know that these series of articles can be of value for you. If you require more details, please let us know.
What did the review reveal and what to do about it?
A. As per the MiFID II regulation, CIFs must establish and publish on their website the so-called ‘Order Execution Policy’. The Policy needs to be specific and in detail for the Clients to assess the arrangements of the CIF before placing an order and entering a trade.
Compliance tips for creating a sound ‘Order Execution Policy’;
– The execution venues and execution factors selected by the CIF need to be disclosed within the policy, including the considered quantitative and qualitative factors, following by their importance,
– CIFs need to specify in which cases they act as a sole execution venue and in which cases the CIF may act as an agent and not a principal to Client orders,
– The remuneration policy of the company of the connected parties allowing the CIF to act as a sole execution venue shall be disclosed within the policy,
– The procedures in place to monitor the effectiveness of the order execution policy must be included within the policy,
– The review and amendment of the policy and subsequent internal policies complement the Best Execution monitoring program need to be specified within the policy,
– Complaints section shall be included within the policy (and all policies) to allow Clients to communicate complaints or request clarifications in relation to the policy,
– Finally, the RTS 27 and RTS 28 reports are considered part of the Best Execution and they need to be linked with the policy.
B. It has been observed that a number of CIFs were not in a position to demonstrate in practice the arrangements described within the ‘Order Execution Policy’.
Compliance tip taken from our best execution inspection article: It is important that the three arrangements of;
1) the execution venues,
2) the liquidity providers, and
3) the group structure, (if any),
be explained in detail for each class of financial instruments, along with the factors taken into account and justifications that enable the company to obtain the best possible result, on a consistent basis, when executing client orders.
Compliance tip for CIFs acting as a sole execution venue and Market Makers/Dealing on Own Account: The RTS 27 analysis and metrics can be used to demonstrate how they deliver the best possible results to Clients.
Compliance tip for connected parties/execution venues: The netting agreements used with connected parties, must demonstrate adequate remuneration and clauses, with primary aim the benefit of the Client.
C. CIFs must be able to showcase the so-called ‘pre-trade’ execution settings and parameters used by the CIF, for each trading platform, bridges and plug-ins (if any).
Bad practices were observed by a few CIFs, providing unfavourable conditions to group of Clients and/or specific events;
1) Latency delays for execution of orders,
2) Hedging profitable Client trades on execution venues with less favourable terms for clients,
3) Minimum time limit to close a profitable order,
4) Asymmetric slippage given to Clients, mostly on events with high volatility.
Compliance tip taken from the article discussing our personal best execution inspection: You will need to demonstrate evidence in regards to the analysis performed and decision of the chosen execution thresholds. Some of the questions to be answered on the ‘pre-trade’ requirements are;
– How the company constructs the quoted rates?
– How transaction costs are added to the raw data feed?
– Who has access to the execution thresholds, quotes validations, spreads, swaps, account types, and any other setting?
D. Robust monitoring programs and procedures need to be in place to assess the execution arrangements of the Company and identify any execution failures. It is highly important for the Compliance function to oversees the monitoring procedures and ensure Compliance with the regulation.
Compliance tip: You will be required to provide evidence from your record-keeping and for each class of financial instruments, for;
– the fairness of the price,
– the comparison of liquidity providers used,
– the comparison of the execution venues and justifications to support a decision to operate under a sole execution venue,
– the slippage symmetry of client orders,
– the slippage symmetry of client orders based on the volume of the orders,
– the slippage symmetry on stop loss, take profit and margin close-out rule, if any,
– the speed of execution at the opening and closing of a client order,
– the rejection percentage of client orders,
– the requotes of orders, if any,
– the daily monitoring of client orders.
Compliance tip to demonstrate the fairness and quality of the prices offered to Clients via its trading platforms: You must be able to compare the prices offered. Further, the record keeping statistics gathered by the CIF on the kept evidences (items mentioned above), shall be compared against those benchmarks.
Compliance tip on real time monitoring, reporting and record keeping of price registers and alerts that identify mishaps need to be held by the responsible team: It is of utmost importance for the CIF to keep evidences on how situations were rectified when it was not able to deliver best execution.
Compliance tip for the Senior management and Compliance function: CIFs must be able to demonstrate the actions taken by the management for correction actions as they arise. Further, the Compliance officers must have the relevant expertise to challenge the procedures performed and document their own opinion in relation to any identified deficiencies and corrective measures.
How can we help you to Comply with Best Execution?
Our team can
1. be engaged to design and implement in-house best execution monitoring program along with the RTS 27 and RTS 28 reports for your Company,
2. train the relevant personnel to ensure compliance with best execution,
3. and prepare the Company to handle an inspection by the regulator.
In particular, the regulator;
– will usually only give you 2-3 days’ notice for the onsite inspection,
– will interview the Risk Manager, the Head of Dealing on Own Account, the Head of Execution, Reception and Transmissions of Orders, the Compliance officer and an Executive Director.
The inspection will be very granular and will require very good preparation from everyone, as the regulator will dive into details through the company’s reports and manuals, the procedures and processes undertaken by the respective people, along with deeper questions on the functionalities of the trading platform(s), the pre-execution and the after-execution procedures.
Achieving the best possible result when executing orders is of extreme importance, as being compliant avoids fines, distractions and enhances the reputation of the firm.
We share all these insights, design and implement in-house monitoring programs and train personnel based on actual inspections experience.
We remain at your disposal should you have any question on the all the above. Please email us at firstname.lastname@example.org.
The information provided in this article is for general information purposes only. You should always seek professional advice suitable to your needs.