Best Execution under MiFID II

MiFID II will set the bar high for best execution – all investment managers should be prepared

Background

  • Best execution under MiFID II means taking all sufficient steps to achieve the best outcomes for client orders, taking into account the execution factors (price, speed, cost, likelihood of execution, and other relevant factors)
  • This goes beyond the MiFID I requirement to take all ‘reasonable’ steps, and therefore sets the bar much higher
  • Firms’ ability to clearly evidence best execution is likely to be a key focus of FCA reviews pre- and post-MiFID II (3 January 2018)
  • Many investment managers have not yet fully assessed what best execution means for them or developed a best execution methodology
  • MiFID II will also require annual reporting of top 5 trading venues (brokers) – though the first reports will not be due until January 2019

Why is it important for our clients?

  • All investment managers regulated under MiFID will need to be able to demonstrate that they achieve and monitor best execution
  • Failing to deliver best execution violates the fiduciary obligation of the investment manager, attracting significant fines and reputational risk
  • Getting best execution right means delivering better investment performance – so there is a positive opportunity for all investment managers and tangible client benefits

Key challenges for investment managers

The key concerns clients tell us they face include:

  • How will the regulator assess best execution performance – and how can we prepare to demonstrate best execution for all trades?
  • How can Transaction Cost Analysis be used to achieve and evidence best execution? What is best practice for TCA?
  • Fixed income and OTC markets – how do we achieve and evidence best execution when there are no reliable benchmarks?
  • Who should be responsible for best execution, and who should monitor it? What should we measure? What tolerances should we apply?
  • How do we guarantee best execution where trading is outsourced to a third party (e.g. custodians executing FX trades)?

How can Alpha help?

Alpha has developed a proprietary best execution assessment, which aligns with the MiFID II requirements, to determine:

  • Current State assessment – how is best execution achieved and evidenced today?
  • Gap analysis – what are the current gaps from a regulatory, operational, technical, or organisational perspective?
  • Roadmap – what needs to be done to close these gaps? What organisational, process, or system changes need to be made?

 

 

“Many of our clients are recognising the demands of best execution and are asking how they can best prepare for MiFID II – our methodology provides a clear roadmap of change to ensure best execution is delivered for investors”

Greg Faragher-Thomas, Alpha Director