Article written by Gareth Coltman, Head of European Product Management, MarketAxess Europe
MiFID II will have a profound and lasting effect on the European fixed income markets. Among the goals of the regulation, include:
Within “increased investor protection”, there are multiple aims which will have a substantial impact on trading. Much emphasis has been placed upon the encouragement of greater transparency, controls to avoid conflicts of interest and investment advice. However, it is the changes to the obligations firms have when receiving, transmitting and executing orders, namely demonstrating best execution, which will have far reaching consequences.
Best execution is split into two main objectives: reporting and monitoring.
Best-execution-reporting is outlined in RTS 27 and RTS 28 of MiFID. RTS 27 places the reporting obligation on execution venues (including MTFs, OTFs and RMs), Systematic Internalisers (SIs) and market-makers, requiring them to publish data relating to the quality of execution. RTS 28 necessitates that investment firm’s make public the top five execution brokers and venues by volume on an annual basis.
The slightly more ambiguous piece of best execution regulation is the monitoring requirement. Article 27 of MiFID II states:
Investment firms should take “all sufficient steps to obtain, when executing order, the best possible result for their clients taking into account price, costs, speed, likelihood of execution and settlement, size, nature or any other consideration relevant to the execution of the order.”
The key differentiator in this definition is the word “sufficient”. Prior best execution monitoring obligations required that firms take all “reasonable” steps to achieve the best possible result for their end-clients. This simple update has significant implications on investment firms as they must now meet a minimum standard which is not specifically defined.
To ensure a firm is meeting their best execution reporting requirements of RTS 27 and RTS 28, they must ensure their venues, SIs and brokers have the necessary information to complete the data publication.
Given the ambiguity around the best-execution-monitoring definition, firms will need to take extra care when establishing policies and procedures for demonstrating compliance. Our best assumption is that best execution will be viewed by the regulator as a process, set within an individual firm, showing that execution quality is being tracked and places for improvement are being measured, including attention on managing transaction costs. Tools to help meet this requirement may be developed in-house at the investment firm or sourced from data or trading venues.
MarketAxess and its subsidiary Trax offer a complete trade lifecycle solution to help firms meet their best-execution-reporting requirements and demonstrate their best-execution-monitoring policies.
By trading on the MarketAxess platform, we seamlessly manage the RTS 27 obligation. Trax, as an Approved Reporting Mechanism (ARM) under MiFID I and II* and an Approved Publication Arrangement (APA) for MiFID II*, offer automated RTS 27 and RTS 28 reporting as an add-on to the ARM and APA services.
To help firms demonstrate compliance with their Article 27 best execution monitoring obligation, MarketAxess and Trax have developed a range of robust data tools to help firms meet their best execution requirements:
In addition to data tools, firms can leverage competitive quotes through MarketAxess’ vast pool of liquidity via a network of over 1,200 firms and the Open Trading™ all-to-all marketplace, which connects disparate pools of liquidity with one another. MarketAxess also offers robust Transaction Cost Analysis (TCA) reports as both a standard solution for trades executed on the platform and a customizable solution including additional benchmarks, metrics, and outlier/exception flagging.
*Pending approval from the UK Financial Conduct Authority