Best execution requirements:
When providing Investment Services to their clients, Licence Holders are obliged to act honestly, fairly and professionally in the best interests of their clients. The principle of ‘best execution’ emanates out of this general obligation.
The duty to provide best execution
The duty to provide best execution consists in taking all reasonable steps to obtain, when executing orders, the best possible result for clients. Naturally, this is an obligation of means, not an obligation of result, and thus, the fact that a best execution is not achieved, does not necessarily mean that a License Holder has breached its duties.
Licence Holders to whom this duty applies are bound to establish and implement effective arrangements and policies for complying with their duty. The Standard License Conditions require that such a policy include in respect of each class of instruments, information on the different venues where the Licence Holder executes its client orders and the factors affecting the choice of execution venue. It shall at least include those venues that enable the Licence Holder to obtain on a consistent basis the best possible result for the execution of client orders.
The importance of the policy is such that a Licence Holder is required to provide sufficient information to its clients on its order execution policy and moreover, it is bound to obtain the prior consent of its clients to the policy. License Holders are also to bring to their clients’ attention - and obtain their consent to - the fact that there might exist the possibility that client orders may be executed outside a regulated market or a multilateral trading facility.
The obligation to draw up a best execution policy does not arise only at the commencement of the License Holder’s activities. On the other hand, every Licence Holder must monitor the effectiveness of its order execution arrangements and execution policy, at least annually or in the case of material changes in relevant circumstances, in order to identify and, where appropriate, correct any deficiencies. In particular, it shall assess, on a regular basis, whether the execution venues included in the order execution policy provide for the best possible result for the client or whether it needs to make changes to its execution arrangements. In the case that there are any material changes to the order execution arrangements or execution policy, clients need to be informed.
The importance of the policy is such that the Licence Holder must be in a position to demonstrate to its clients, at their request, that it has executed their orders in accordance with the Licence Holder’s execution policy. In the specific case of retail clients, a License Holder must provide the following details on their policy in good time prior to the provision of the service:
- a list of the execution venues on which the Licence Holder places significant reliance in meeting its obligation to take all reasonable steps to obtain on a consistent basis the best possible result for the execution of client orders;
- a clear and prominent warning that any specific instructions from a client may prevent the Licence Holder from taking the steps that it has designed and implemented in its execution policy to obtain the best possible result for the execution of those orders in respect of the elements covered by those instructions
Such information is to be provided in a durable medium or by means of a website.
Criteria to be taken into account
A number of factors are to be taken into account by a License Holder when executing orders, such as price, costs, speed, likelihood of execution and settlement, size, nature or any other consideration relevant to the execution of the order. In so doing, a Licence Holder shall take into account the following criteria for determining the relative importance of the factors
- the characteristics of the client including the categorisation of the client as retail or professional;
- the characteristics of the client order;
- the characteristics of instruments that are the subject of that order;
- the characteristics of the execution venues to which that order can be directed.
In the case where a Licence Holder executes an order on behalf of a retail client, the best possible result is determined in terms of the total consideration, representing the price of the Instrument and the costs related to execution, which include all expenses incurred by the client which are directly related to the execution of the order, including execution venue fees, clearing and settlement fees and any other fees paid to third parties involved in the execution of the order.
Moreover, in cases where there is more than one competing venue to execute an order for an instrument, in assessing and comparing the results for the client on each of the execution venues that is capable of executing that order, the Licence Holder’s ’s own commissions and costs for executing the order on each of the eligible execution venues are to be taken into account in that assessment. In this respect, a Licence Holder is bound not to structure or charge its commission in such a way as to discriminate unfairly between execution venues.
To whom does the duty apply?
License Holders’ duty of best execution of client orders arises whenever License Holders act on behalf of their retail or professional clients. On the other hand, License Holders do not owe a duty to provide best execution with respect to clients which qualify to be treated as eligible counterparties.
The duty of best execution of client orders is owed by License Holders which:
- execute orders on behalf of clients and /or
- provide the service of reception and transmission of orders when transmitting such orders to other entities for execution and /or
- provide the service of portfolio management, when placing orders with other entities for execution that result from decisions to deal in instruments on behalf of clients’ portfolios.
The Standard License Conditions also prescribe specific conditions to License Holders whose activities consist in the carrying out of portfolio management services, and the reception and transmission of orders. This is so because these entities would need to rely on others in order to execute the orders.
License Holders which receive and transmit orders to other intermediaries for execution typically operate by placing orders with or transmitting orders to other License Holders which execute the orders. In this way, a “chain of execution” may be seen to be formed with some aspects of execution being performed at different points in the chain. A chain of execution can take many forms and may be of different length. The Standard License Conditions impose the best execution requirements on License Holders in different ways depending on the investment service the License Holder is providing. The overarching obligation however, is always that License Holders should take all reasonable steps to deliver the best possible result for their clients.
When providing the services of transmission and reception of orders (arranging deals), a Licence Holder does not execute the deal itself, but passes instructions to a third party to do this. In such cases, the License Holder shall comply with the obligation to act in accordance with the best interests of its clients when transmitting client orders, to other entities for execution. In the particular cases where a License Holder provides the service of portfolio management, it has to act in the best interests of its clients when placing orders with other entities for execution that result from decisions by the Licence Holder to deal in Instruments on behalf of its clients.
In such a case, the License Holder shall still take all reasonable steps to obtain the best possible result for its clients. To this end, the License Holder shall establish and implement a policy to enable it to comply with this obligation. The policy shall identify, in respect of each class of Instruments, the entities with which the orders are placed or to which the License Holder transmits orders for execution. The entities identified must have execution arrangements that enable the License Holder (transmitter of the order) to comply with its obligations under the conditions when it places or transmits orders to that entity for execution. The Standard License Conditions relating to best execution are not intended to require a firm that transmits or places orders with other entities for executing to duplicate the efforts of its execution entities. Rather, a License Holder should determine that the entities it uses will enable it to comply with the overarching best execution requirement when placing an order with, or transmitting an order to, another entity for execution.
License Holders which receive and transmit orders for execution are obliged to monitor the execution quality of those entities on a regular basis. In this regard, such License Holders are encouraged to examine the execution approaches of those entities prior to selecting them and keep these approaches under review as appropriate.
License Holders are not prohibited from using third country intermediaries or venues which are not subject to MiFID’s best execution requirements. In such case, the License Holders should still satisfy themselves that those intermediaries or venues have execution arrangements or standards of execution quality that will allow them to comply with the requirements of the Standard License conditions. If License Holders which transmit client orders for execution to third parties cannot satisfy themselves in this regard, they cannot discharge their obligations under the Standard License Conditions.
Another important proviso is that the duty of best execution does not apply where there is a specific instruction from the client. In this case, the Licence Holder is relieved of the duty to provide best execution and it is obliged to execute the order following the specific instruction of the client. However, the fact that the client has given specific instructions which cover one part or aspect of the order should not be treated as releasing the License Holder from its best execution obligations in respect of any parts or aspects of the client order which are not covered by such instructions.
