SEPTEMBER 2018 J.P. MORGAN FICC EXECUTION DESK: EXECUTION POLICY APPENDIX 7

Transcription

1 SEPTEMBER 2018 J.P. MORGAN FICC EXECUTION DESK: EXECUTION POLICY APPENDIX 7

2 Table of contents 1. Introduction Scope Execution Factors Factors affecting our choice of Execution Venues Order Handling FX Orders Execution Monitoring and Review A. Appendix A - List of Trading Venues B. Appendix B Glossary of terms... 12

3 1. Introduction This document sets out the J.P. Morgan FICC Execution Desk business (the FICC Execution business) approach to Best Execution when handling orders in fixed income, currency and derivative instruments, unless expressly indicated otherwise. This document is an Appendix to the J.P. Morgan Execution Policy (the Overarching Execution Policy), which is available here. This Appendix should be read together with the Overarching Execution Policy. All definitions used herein shall be capitalized and have the meaning given in the Overarching Execution Policy or otherwise in the Glossary (Appendix B to this document). All transactions executed by the FICC Execution business will be executed on a Matched Principal basis: Matched Principal trading means a transaction where the facilitator interposes itself between the buyer and the seller to the transaction in such a way that it is never exposed to market risk throughout the execution of the transaction, with both sides executed simultaneously, and where the transaction is concluded at a price where the facilitator makes no profit or loss, other than a previously disclosed commission, fee or charge for the transaction (MiFID II Article 4(1)(38)). This means that the FICC Execution business will always, unless in receipt of a specific instruction not to do so, execute two simultaneous principal transactions between you as the client and J.P. Morgan and J.P. Morgan and a Liquidity Provider on a MIFID II Execution Venue (which may include J.P. Morgan Market Making desks). Further Information In producing the Overarching Execution Policy and this Appendix, we have provided information we believe to be appropriate to facilitate you making an informed decision regarding our execution practices. For clients or prospective clients who would like to understand in further detail the way in which we will usually handle a range of typical orders, please contact your normal FICC Execution business representative. Please note that J.P. Morgan Securities PLC is authorised by the Prudential Regulation Authority (PRA) and regulated by the PRA and the Financial Conduct Authority. Accordingly, in addition to any obligations it may have as regards provision of Best Execution, J.P. Morgan must pay due regard to the interests of its clients and treat them fairly. 1

4 2. Scope Nature of the client interaction As a client of the FICC Execution business you will enter into a contractual arrangement whereby Best Execution will be provided to you as a service by the FICC Execution business for each transaction executed in Financial Instruments (as defined under MiFID II). Best Execution will therefore be owed by the FICC Execution business on all client orders in Financial Instruments. There may however be a limited application of Best Execution obligations with respect to certain instruments and in specific circumstances. These circumstances are detailed below. In-scope orders With respect to the FICC Execution business, orders are generally categorised as follows: Request for Quote ( RFQ ) on behalf of the client These are orders where you as a client instruct us to request quotes on certain Financial Instruments in the market on your behalf. With this order type, the FICC Execution Business will facilitate a Request For Quote, on behalf of its clients, either electronically or via voice, at the relevant Trading Venue and/or Liquidity Provider, and will allow its clients to accept or reject the price and other execution conditions derived by means of the RFQ. Worked Orders When submitting a Worked Order, you as the client afford the FICC Execution business elements of or total discretion to execute that order on your behalf. Limit and Market orders should be considered Worked Orders. Where the FICC Execution business accepts a Worked Order, we will consider the different execution factors in the context of the instructions that you have provided to form a suitable execution strategy. Under this execution strategy we will take all sufficient steps to obtain the best possible result for you by employing appropriate aspects of our execution arrangements. Our execution strategy may result in us communicating your order to one or more Execution Venues immediately or working your order over a period of time. For the avoidance of doubt, all orders relating to FX Transactions will be Worked Orders. RFQ on behalf of the client and Worked Orders are further defined in the Order Handling section below. Specific Instructions Where you give us a specific instruction, such as specifying an Execution Venue or the placement time of an order, to the extent that we accept and follow your instructions we will have satisfied any Best Execution requirements with respect to that aspect of your order. The remaining elements of the order not covered by your specific instructions will remain subject to Best Execution requirements. Spot Foreign Exchange (FX) Spot transactions in FX and commodities are not regarded as Financial Instruments and therefore Best Execution does not apply to such transactions. However, whilst spot FX is not a Financial Instrument, so far as is reasonably possible, the FICC Execution business will seek to apply similar Best Execution standards. 2

5 All FX transactions will be executed by the J.P. Morgan FX Services ( FX Services ) business, which is an internal J.P. Morgan business partner to the FICC Execution business. 3

6 3. Execution Factors The FICC Execution business considers the following factors when executing your order: Price Size and Likelihood of Execution Speed Costs Likelihood of Settlement Other aspects of the order relevant to the execution Certain factors are more important than others. When we execute an order for you, by default we will consider the factors listed below to be the most important. Notwithstanding this, there are certain situations in which the relative importance of these factors will change in response to the instructions that you provide. Price: this refers to the resulting price of the transaction excluding the FICC Execution businesses own execution charges. Generally this is deemed as one of the most important considerations and will be determined from general market conditions including liquidity and hedging costs. Size and Likelihood of Execution: we interpret this as the likelihood that we are able to fill your order, or at least a substantial part of it, in its entirety. This factor increases in importance in situations where access to liquidity in the relevant instrument is constrained in some way. For example, if the Financial Instrument or FX spot itself is illiquid or if you provide a limit price which is not marketable. This factor increases in importance when indicative price information substantially differ from historic Hit/Miss Ratio of Liquidity Providers, or in a situation where you provide a limit price which is not marketable. Speed: we interpret speed as the time at which we progress your order. We will progress your order at a rate which we believe represents a balance between creating Market Impact and executing your order so as to reduce execution risk. Costs: commissions, costs and the fees that are charged for executing your order by J.P. Morgan or third party. If you deal with us on a fixed fee basis, the J.P. Morgan costs will have a lesser influence in the way that we execute your order. If you have a commercial arrangement with us in which those costs influence our own charges to you, we will agree an appropriate way with you to incorporate costs into our execution strategy. We will also agree a schedule of fees that makes clear the charges that you will incur for the usage of different Execution Venues. Likelihood of Settlement: we expect transactions that we execute for you to settle in a timely fashion in line with market standards or as otherwise agreed. If you are in doubt about any of these factors and for information specific to the relevant execution situation please contact your usual J.P. Morgan FICC Execution business representative. 4

7 4. Factors affecting our choice of Execution Venues The FICC Execution business will execute your order on Trading Venues, i.e. Regulated Markets, Multilateral Trading Facilities (s) or Organised Trading Facilities (OTFs), as defined in MiFID II. We might also execute your order with the J.P. Morgan Market Making desks (which act as part of the J.P. Morgan Systematic Internaliser) outside of a Trading Venue, but only in the cases detailed below in the Liquidity Provider selection section. We will execute your transaction on one of the Trading Venues listed in Appendix A. We will choose the Trading Venue based on its cost to you, on the type of order, on the instrument and its liquidity profile, on the volume traded on it, on the time of the day, on past execution performance and any other information that might be relevant to execute the order with the best possible result. Specific factors considered are described in detail below. Where we negotiate transactions on your behalf and do not obtain your agreement to the terms of those transactions in advance we continue to owe you Best Execution Liquidity/Size and Price (importance: high): this considers whether a Trading Venue provides, or is likely to provide, material opportunities to trade. Those opportunities may take the form of prices which improve on those offered by our existing Trading Venues or the ability to trade significant additional size at similar prices to those offered on existing Trading Venues. We expect liquidity and price to be closely (but not exclusively) associated with the market share the venue commands. Credit and settlement risk (importance: high): we will not generally use a Trading Venue/Liquidity Provider if we are not able to determine the obligations (both on us and our trade counterparty) either to settle a transaction or to resolve failed settlements. Realised performance (importance: high): The FICC Execution business will gather and frequently review performance data obtained over the course of our utilisation of a Trading Venue/Liquidity Provider to determine whether to retain or disqualify a Trading Venue/Liquidity Provider from on-going use. Metrics will be created and considered. These will include but are not limited to: speed, liquidity, price improvement, fill rates and pricing analysis. Market Microstructure / Operating model (importance: medium): we will primarily assess Execution Venues according to the following themes: Market mechanism: we will assess whether the Trading Venue functions in a way that might benefit or hinder our ability to achieve Best Execution. Commercial positioning: we will assess whether the rules of the Trading Venue and its fee structures encourage or discourage participants and trading behaviours that are compatible with the aims of achieving Best Execution. Resilience and reliability: we will assess whether we have confidence that the venue is reliable across a range of market conditions. Likelihood of execution (importance: medium): given the fragmented nature of the fixed income market, we will select the Execution Venue based on historic data given the instrument and size of the order and insofar take into account the likelihood of execution. Liquidity Provider selection: The FICC Execution business will seek competitive executable quotes from a minimum number of Liquidity Providers on Trading Venues (see Order Handling section below). In normal circumstances, the J.P. Morgan Market Making desks will be requested for an executable price via a Trading Venue in competition with other Liquidity Providers, unless: 5

8 (i) (ii) the client has specifically instructed the FICC Execution business to execute a transaction specifically with the J.P. Morgan Market Making desks; or the FICC Execution business, having taken all sufficient steps, determines that executing with J.P. Morgan Market Making desks directly (i.e. outside a Trading Venue) would provide the Best Execution for your order. The selection of Liquidity Providers to whom the request is sent will depend, among other things, on the client instructions (if any), the type of instrument, the type and the size of the order, the time of the day and the performance of each liquidity provider with regards, among other things, to hit ratio, speed, response rate, size slippage and expected Market Impact based on past experience and data available. Information about axes available to the FICC Execution business can also be taken into account in the selection. 6

9 5. Order Handling Once we have accepted your order we will consider the different execution factors in the context of the instructions that you have provided to form a suitable execution strategy. Under this execution strategy we will take all sufficient steps to obtain the best possible result for you by employing appropriate aspects of our execution arrangements. Our execution strategy may result in us communicating your order to one or more Execution Venues immediately or working your order over some period of time. The execution strategy employed will take into account any information that you provide us with, together with our knowledge of the relevant instrument and the market in which you are seeking to execute. The execution strategy employed will be formed by the judgement of the individuals assigned to handle your order, together with the automatic processes available to them. We have set out below the range of instructions that we typically receive and which provide the best collective illustration as to how we will usually execute orders on your behalf. This list is not exhaustive; should you wish to discuss our treatment of an instruction which is not listed, please contact your normal FICC Execution business contact. Order Instruction Worked Order- Market Order Worked Order - Limit Order (not for FX) Request for Quote ( RFQ ) on behalf of the client (not for FX) Default order handling assumptions Description An order with no limit price for which execution is expected to be initiated immediately with existing buyers or sellers in the market. An order with a limit price such that, given prevailing market conditions, the order is executed at that price or better. An instruction from you as a client for the FICC Execution business to seek the best available executable Liquidity Provider quote on a Trading Venue, which you can accept or reject. If you accept the quote, which will be communicated to you via the FICC Execution business, the final confirmation of the transaction will be made once the trade has been finalised with the relevant Liquidity Provider. If, during the negotiation process the quote price changes to your detriment, the trade will only be executed if either (i) you confirm acceptance of the new price, or (ii) you have specified a price change tolerance level (e.g. a limit price) and the new quote price is within this tolerance level. If during the negotiation process the quote price changes in your favour, the FICC Execution business will automatically execute against the better quote price and the price improvement and its economic benefit will be passed in full to you. Partial fills: unless specified, orders will be filled in full or not at all. If partial fills are to be accepted, clients should explicitly indicate it and specify the minimum fill quantity. Time in Force: unless cancelled before, orders will be worked until the end of the London business day (5 pm London time) and then cancelled. Orders will not be worked over multiple days but have to be re-instated each day. 7

10 Number of Liquidity Providers approached: on those Trading Venues which operate an RFQ protocol, for liquid instruments a minimum of 3 liquidity providers, including J.P. Morgan Market Making desks, will normally be asked for a price. The order can be executed or the best price shown to the client when a minimum of 2 quotes has been received and after a reasonable time has elapsed. If only one quote is available, the client must confirm they are happy to go ahead with the execution. Depending on the order and if it is in the interest of the client, a request to only one or two Liquidity Providers can be made. Client order matching: client orders will not be matched or netted with each other. Each order will be individually executed with a Liquidity Provider. Timing: Order execution will be initiated sequentially based on a first in, first out policy. A Limit Order can be sent for execution multiple times if the FICC Execution business believes the chances of reaching the target limit are reasonable. Limit Orders: if a Limit Order is not immediately executable, it will be monitored by the desk and the FICC Execution business held in an internal order resting facility until it becomes likely to be executed. The order can also be placed on a Trading Venue if this increases the quality and likelihood of execution. 8

11 6. FX Orders Execution of FX orders will be managed by the J.P. Morgan FX Services business. FX spot, swaps and forwards will be executed only on a Market Order basis using Thomson Reuters FXAll as the Trading Venue. 9

12 7. Execution Monitoring and Review The FICC Execution business monitors Best Execution through post-trade performance metrics. The purpose is to monitor the correct application of internal decision processes by the FICC Execution business. The monitoring also determines whether the respective executions fulfil Best Execution requirements. The results of the Best Execution monitoring are reviewed by the control-related functions within J.P. Morgan on an ongoing basis and are discussed by J.P. Morgan management and control functions within a committee that has been established for the purpose of governing Best Execution. This committee will review the results of execution monitoring on a regular basis or at such other appropriate time intervals determined by J.P. Morgan management in order to evaluate the effectiveness of the firm s execution arrangements. Where appropriate any corrective action that may be required will be taken by J.P. Morgan management. J.P. Morgan will use both internal management information systems and third party Transaction Cost Analysis (TCA) tools in order to evaluate the effectiveness of the J.P. Morgan FICC Execution: Execution Policy in the Best Execution committee. Subject to the agreement in place with the TCA provider, the results of TCA analysis in relation to each client s order execution will be shared with you as the client. The aggregate results can be made available to you on an anonymised basis. You can also request specific information and logs about individual orders you submitted to the FICC Execution business in order to assess whether the FICC Execution business has taken all sufficient steps to achieve Best Execution. 10

13 A. Appendix A - List of Trading Venues Trading Venues: these are venues which are classed as such under MiFID II. We access these venues under our own membership. Trading Venue Legal Name MarketAxess Europe Limited Tradeweb Europe Limited EUROMTS Limited Bloomberg Trading Facility Limited Reuters Transactions Services Limited iswap Euro Ltd Icap Securities Ltd BGC Brokers LP BGC Brokers LP Tradition (UK) Ltd Tullet Prebon Europe Tullet Prebon Securities Trading Venue Type OTF OTF OTF OTF 11

14 B. Appendix B Glossary of terms Term Best Execution Financial Instrument Execution Venue Trading Venue Request for Quote on behalf of the client Worked Orders Market Impact MiFID MiFID II Systematic Internaliser Matched Principal Liquidity Provider Explanation The obligation to take all sufficient steps to obtain, when executing orders, the best possible result for our clients taking into account the relevant execution factors. As defined by MiFID II in Annex I Section C Execution venues include Regulated Markets, Multilateral Trading Facilities, Organised Trading Facilities (not applicable to equity instruments) Systematic Internalisers, Market Makers and Liquidity Providers A term comprising venues which are regulated under MiFID II as Regulated Markets, Multilateral Trading Facilities or Organised Trading Facilities. With this order type, the FICC Execution Business will facilitate a request for quote, on behalf of its clients, either electronically or via voice, at the relevant Trading Venue and/or Liquidity Providers, and will allow its clients to accept or reject the price and other execution conditions derived by means of the RFQ. Transactions on behalf of the clients will be executed upon acceptance by the end dealer, which can be J.P. Morgan own liquidity or another third party Liquidity Provider. Orders which cannot, by virtue of their nature or size, be sent immediately to one or more Execution Venues, and require manual intervention by the execution desk. Movement of the price of a security that may follow orders or transactions in that security. The Markets in Financial Instruments Directive. The collective name for the Markets in Financial Instruments Directive and Markets in Financial Instruments Regulation. An investment firm which, on an organised, frequent, systematic and substantial basis, deals on own account when executing client orders outside a regulated market or. Matched Principal trading means a transaction where the facilitator interposes itself between the buyer and the seller to the transaction in such a way that it is never exposed to market risk throughout the execution of the transaction, with both sides executed simultaneously, and where the transaction is concluded at a price where the facilitator makes no profit or loss, other than a previously disclosed commission, fee or charge for the transaction Firms that hold themselves out as being willing to deal on own account, and which provide liquidity as part of their normal business activity, whether or not they have formal agreements in place or commit to providing liquidity on a continuous basis. 12