Best Execution in Practice and the new RTS 27/28 requirements
In today’s dynamic financial landscape, investors are increasingly engaged with a variety of new trading systems, as well as complex services and instruments. In response to this evolution, the European Union (EU) recognized the need for a more stringent regulatory framework to protect investors. This framework aims to encompass the full spectrum of investor-oriented activities, ensuring high-quality transaction execution while maintaining the integrity and efficiency of the financial system.
Given these developments, establishing harmonized practices is essential for achieving optimal transaction execution for investors. At Union level, best execution practices and requirements are mandated by the Markets in Financial Instruments Directive (MiFID II). These practices guide European Investment Firms in securing the best possible outcomes when executing client orders, all while promoting market efficiency and integrity.
In this article, the SALVUS Regulatory Compliance team will touch upon the following key areas:
1. Best Execution Responsibility
2. CySEC’s Circular C343 and best practices to comply with Best Execution
3. RTS 27 & 28 Reports and the new requirements
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1. Best Execution Responsibility
The best execution requirements are a crucial component of MiFID II’s investor protection standards, designed to promote market efficiency and ensure optimal execution outcomes for client orders. Under MiFID II, investment firms must take all necessary, not just reasonable, steps to establish an order execution policy that is:
- clear,
- sufficiently detailed for the client, and
- written in an understandable manner.
Member States, including Cyprus must ensure that investment firms act in accordance with the best interests of their clients, and they comply with their obligations under MiFID II. The requirements of this Directive, elevate compliance standards and broaden the responsibilities of investment firms. They are required to implement robust procedures to record and assess relevant metrics after trades are executed, allowing also for adjustments to pre-execution settings and arrangements as needed.
Another key requirement is that firms must assess the fairness of the price proposed to their clients, by gathering market data used for price estimation and compare them with other similar products. Information on how the investment firms will execute client orders shall be included in the execution policy, in sufficient detail and in language easily understood by clients. The execution policy shall match the internal policies and practices, while this constitutes a potential area of inspection by the regulator.
2. CySEC’s Circular C343 and best practices to comply with Best Execution
The Cyprus Securities and Exchange Commission (CySEC) has highlighted critical weaknesses in the implementation of order execution policies among Cyprus Investment Firms (CIF). Therefore, in Circular C343, CySEC urges all CIF to reassess their compliance with best execution obligations and, where necessary, implement corrective measures.
A significant observation from CySEC is the lack of effective compliance functions within several CIF regulated entities. This deficiency often results in insufficient oversight of monitoring procedures and inability to meet regulatory standards for best execution. To address this issue and achieve best execution, it is essential for Compliance Officers to possess the expertise needed to identify weaknesses, critically assess existing procedures, and document their findings along with recommended corrective actions.
For support with your best execution obligations, contact us at info@salvusfunds.com or explore our Master Best Execution Requirements in 2024 course for a comprehensive guide in achieving best execution compliance.
3. RTS 27 & 28 Reports and the new requirements
In September 2021, the European Securities and Markets Authority (ESMA) as part of its consultation paper on its review of the MiFID II framework, identified critical weaknesses with the Regulatory Technical Standards (RTS) 27 & 28 reports. RTS 27 & 28 reports are part of the best execution obligations of investment firms in the Union and consequently of CIF.
The weaknesses identified in RTS 27 included limited accessibility to reports, which were only available upon request. Once accessed, the reports contained a large volume of data and exhibited inconsistencies across different venues. Moreover, regarding RTS 28, a noteworthy deficiency was the provision of insufficient data regarding the quality of the execution which led to the prevention of assessment and comparison between the different firms.
To address these issues, ESMA has postponed the publication of the reports and proposed several enhancements, including the publication of the reports in a harmonized format, ensuring they are easily accessible through the EU Single Point of Access (ESAP). Additionally, the revised reports will focus on a limited set of indicators, providing a clearer overview of the execution quality.
Final thoughts
In summary, as the financial landscape continues to evolve, the need for adequate regulatory frameworks becomes increasingly critical to protect investors and enhance market integrity. MiFID II’s best execution requirements represent a significant step forward in ensuring that investment firms protect their clients’ interests through transparent and effective order execution policies and procedures.
CySEC, through Circular C343, emphasises the importance of compliance functions in identifying and addressing weaknesses in execution practices. Furthermore, the upcoming enhancements to RTS 27 and 28 reports aim to improve the accessibility and clarity of execution quality data. By following these practices, investment firms will not only comply with their obligations but also foster trust and confidence among their clients.
In collaboration with the Institute for Professional Excellence (IforPE), SALVUS offers a self-study CPD course titled “Master Best Execution Requirements in 2024.” Specifically designed for professionals in the financial industry, this course provides an essential overview of the key requirements for achieving best execution standards.
For support with your best execution obligations, contact us at info@salvusfunds.com or explore our Master Best Execution Requirements in 2024 course for a comprehensive guide in achieving best execution compliance.
#StayAhead
If you are interested to learn more on Best Execution and RTS 27/28 reports, please visit the relevant articles below:
- RTS 27 & 28 Reports for CySEC regulated entities
- Are you complying with the Best Execution obligations?
- Complying with the MiFID II Reporting Obligations of RTS 27 & RTS 28
The information provided in this article is for general information purposes only. You should always seek professional advice suitable to your needs.
