1. What is Best Execution?

As per the MiFID II, Best Execution refers to the responsibility of investment firms to take all sufficient steps to obtain the best possible result when executing client orders, accounting for specific execution factors, such as

• price,
• costs,
• speed,
• size,
• nature,
• likelihood of execution, and
• any other factor relevant to the execution of orders.

All sufficient steps mandate even more transparency compared to MiFID I in which Best Execution refers to the responsibility of the investment firms to take all reasonable steps to obtain the best possible result when executing client orders. Investment firms are obliged to provide clients with clear and sufficiently detailed information. In this respect, an order execution policy, along with quarterly and annual reports providing data relevant to the quality of execution needs to be disclosed, as well as employ advanced technological tools to ensure Best Execution monitoring on how the firm secures client interests.

2. Good Best Execution practices for CySEC regulated entities

To promote compliance with Best Execution obligations the Cyprus Securities and Exchange Commission (CySEC) outlines the following good practices for obliged entities like Cyprus Investment Firms (CIF):

• Establish and publish on their website the Order Execution Policy to allow existing and potential clients to assess the CIF arrangements before placing an order or entering a trade.
• Maintain the ability to demonstrate in practice the arrangements discussed within the Order Execution Policy.
• Demonstrate evidence of the analysis performed and the decisions taken for the set execution thresholds.
• Employ robust monitoring programs and procedures to assess the firm’s execution arrangements and identify execution failures.

3. The importance of the Order Execution Policy

Creating and publishing an Order Execution Policy provides investors with all the necessary details for making informed decisions before investing. A sound Order Execution Policy requires, at least:

• disclosure of the execution venues and execution factors, including both quantitative and qualitative factors accompanied by their importance,
• specification of the cases where the CIF acts as the sole execution venue and the cases it may act as an agent,
• disclosure of the group structure and the use of a connected party as an execution venue,
• the remuneration received from connected parties allowing the CIF to act as a sole execution venue,
• the monitoring procedures established to evaluate the effectiveness of the policy,
• redirecting the customers to the RTS 27 & 28 reports of each execution venue used, including their own,
• details regarding the review and amendment of the policy along with material changes which may suggest amendment of the policy and the arrangements,
• a complaints section to allow investors to communicate their complaints or request clarifications regarding the policy.

4. RTS 27 & RTS 28 reports

RTS 27 & RTS 28 reports refer to the regulatory technical standards developed by the European Securities and Markets Authority (ESMA) that obliged entities are required to publish on a quarterly and annual basis respectively.

The scope of the reports is to guide clients, both retail and professional, regarding the execution venues preferred and the quality of execution for all transactions.

The RTS 28 report, known as the Execution Quality Summary Statement (EQSS), provides information on the top five execution venues including inter alia:

• the class of financial instruments,
• the venue name and identifier,
• the volume and number of client orders executed at that execution venue,
• the percentage between passive, aggressive and directed orders,
• a confirmation regarding the execution of less than one trade per business day on average, during the previous year for that class of financial instruments.

The report must include a summary of the performed analysis with an explanation of the relative importance given to each factor and a reference to any close links, conflicts of interests, and common ownerships. Furthermore, the report shall discuss specific arrangements with other execution venues and changes in the list of execution venues included in the firm’s order execution policy.

The RTS 27 Report refers to the Data Quality of the firms providing the service of Dealing on Own Account, acting as a principal to client orders.  It is comprised of eight tables that provide explicit data on the quality of all the orders executed.

As per Directive (EU) 2021/338 the RTS 27 reporting obligation has been postponed until the 28^th of February 2023 when revised reporting obligations are expected to come into effect for both RTS 27 & 28 reports. This has resulted from significant deficiencies identified in the interpretation of the reports and whether they have been assisting investors by providing them with practical information.

5. Best Execution regulatory inspection

Regulators must ensure that obliged entities have established and maintain adequate procedures and systems to offer clients with Best Execution. To conduct a Best Execution thematic inspection national competent authorities, like CySEC, examine the following aspects:

• the firm’s main execution arrangements,
• the processes followed for delivering Best Execution,
• unacceptable practices performed,
• governance and oversight.

In addition, obliged entities shall expect the regulator to ask questions relevant to the scope, delivery, review and monitoring of Best Execution and the firm’s specific arrangements. For that purpose, we invite obliged entities to ensure that they are always prepared since the regulator will usually provide a two or three day notice before the inspection visit.

Final thoughts

To conclude, Best Execution is a crucial responsibility of obliged entities involved with the provision of investment services. To this end, the newly introduced Crypto-Asset Services Providers (CASP) according to the European Regulation on Market in Crypto Assets (MiCA) will also be expected to ensure Best Execution of their client’s orders. MiCA is expected to come into force within 2023 therefore, potential CASP shall provision for the relevant arrangements.

Employees holding key positions in CIF, CASP and other CySEC regulated entities shall be in a position to design, establish and implement adequate procedures and systems to ensure that clients’ orders are executed under the most beneficial circumstances.

In this respect, SALVUS Funds in collaboration with the Institute for Professional Excellence (IforPE) has prepared a self-study course titled Best Execution in Practice suited for the annual Continuous Professional Development (CPD) requirements of professionals employed in the investment services industry.

The course is designed to provide participants with the necessary information on the responsibilities relating to best execution including the utilisation of advanced technological tools, the upcoming changes concerning the existing reporting obligations of RTS 27 & 28, as well as what to expect during a best execution regulatory inspection.

Lastly, the SALVUS Regulatory and Compliance team is able to assist Investment Firms and Funds, CASP and other CySEC regulated entities, to achieve compliance with the Best Execution regulatory obligations.

Do not hesitate to contact us at info@salvusfunds.com or call us at +357 7000 7898 if you have any questions about your Best Execution obligations or should you require more information about our Best Execution in Practice course on IforPE

#StayAhead

Should you be interested to read more about compliance with Best Execution, Cyprus Investment Firms, or the Markets in Crypto Assets regulation, please visit the selected articles below:

• MiCA and the CySEC CASP regime in Cyprus
• Establishing an Investment Firm in 2022 in Cyprus
• Are you complying with the Best Execution Obligations?

The information provided in this article is for general information purposes only. You should always seek professional advice suitable to your needs.