Best Execution. Andre Nogueira

Transcription

1 Best Execution Andre Nogueira

2 BEST EXECUTION Best Execution under MiFID II ESMA published Level 2 guidance on Best Execution (found under Regulatory Technical Standards 27 and 28) last year. In this sessions, we will go over some of the key changes to Best Execution introduced by MiFID II. We will also provide an overview of Bloomberg s solutions to help your firm with the implementation of Best Execution under MiFID II. 2

3 BEST EXECUTION UNDER MiFID II Definition Bloomberg Solution Scope Best Execution Reporting Execution Policy Monitoring Obligations 3

4 BEST EXECUTION Definition Key Changes Under MiFID II Under MiFID II, Member States shall require that Investment Firms take all sufficient steps to obtain, when executing orders, 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. Under the original MiFID regulation, firms were mandated to take all reasonable steps to achieve the best possible results for their clients, while under MiFID II, firms will be required to take all sufficient steps. The new requirements are a step-up from the original MiFID, providing a more formal structure to the best execution and implying that EMSA will be expecting firms to place a greater focus on Best Execution. Under MiFID II, ESMA included fairness as a consideration when executing orders. This is especially relevant for OTC/Bespoke products, where the availability of pricing information cannot always be counted on. 4

5 BEST EXECUTION Definition Key Changes Best execution for retail client orders should be assessed on the basis of total consideration. Total consideration is defined as the sum of the price and the costs incurred by clients including: Price of the financial instrument Costs relating to execution All expenses incurred by the client which are directly relating to the execution of the order Including execution venue fees, clearing and settlement fees Any other fees paid to third parties involved in the execution of the order 5

6 BEST EXECUTION UNDER MiFID II Definition Bloomberg Solution Scope Best Execution Reporting Execution Policy Monitoring Obligations 6

7 Scope - Venues BEST EXECUTION Under MiFID II, Best Execution requirements apply to investment firms in relation to client orders executed on: Trading venues (including OTFs) Systematic internalisers Market makers, Other liquidity providers, or Entities that perform a similar function to those performed by any of the foregoing in a third country. 7

8 Scope Third Country BEST EXECUTION Trading venues, systematic internalisers, market makers and other liquidity providers in a third country will be subject to the same requirements. Best execution requirements apply to activities carried out by an investment firm in the EU, save where services are carried out from a non-eu branch to non-eu persons. For a non-eu firm operating through a branch in the EU, if the member state has opted into the branch regime in MiFID II, it will be required to comply with MiFID II rules. Otherwise it will depend on the member state s local regime. 8

9 BEST EXECUTION Scope Instrument Categories Equities Shares Depositary Receipts Debt Instruments Bonds Money markets instruments Interest Rate Derivatives Futures & Options Swaps Forwards Others Credit derivatives Futures & Options Others Currency Derivatives Futures & Options Forwards & Swaps Others Structured Finance Instruments Equity Derivatives Futures & Options Swaps Others Securitized Derivatives Warrants Certificates Derivatives Others Commodity derivatives Futures & Options Others Contracts for Difference Exchange Traded Products Exchange Traded Funds Exchange Traded Notes Exchange Traded Commodities Emission Allowances Other Instruments 9

10 BEST EXECUTION UNDER MiFID II Definition Bloomberg Solution Scope Best Execution Reporting Execution Policy Monitoring Obligations 10

11 BEST EXECUTION Execution Policy - Contents Under MiFID II, a firm s execution policy must be written to explain clearly, in sufficient detail and in a way that can be easily understood by clients how orders will be executed by the firm for the client. The policy must be customized based on class of financial instrument and client type. For retail clients, policy should focus on total consideration. The policy summary should include a link to most recent execution quality data published. The execution policy should include information on venues where investment firm executes its client orders and the factors affecting the choice of execution venue. The execution policy must be disclosed to clients and firms are required to obtain clients prior consent. Firms must notify clients of any material changes to their execution policy. 11

12 BEST EXECUTION Execution Policy - Disclosures Under MiFID II, any arrangements with a particular execution venue must be disclosed by the firm. When the fees applied by the investment firm differ depending on the execution venue or entity used, information should be provided to clients to allow them to understand both the advantages and the disadvantages of the firm s choice of one execution venue or entity over another. Where the firm invites the client to choose the execution venue or entity this information shall be fair, clear, not misleading and sufficient to prevent the client choosing one execution venue or entity rather than another on the sole basis of the price policy applied by the firm. ESMA states that investment firms should not induce a client to instruct it to execute an order in a particular way, by expressly indicating or implicitly suggesting the content of the instruction to the client, when the investment firm ought reasonably to know that an instruction to that effect is likely to prevent it from obtaining the best possible result for that client. 12

13 BEST EXECUTION Execution Policy Venue Bias There is no strict minimum number of venues required for each instrument category when developing an Order Execution Policy. Firm can include only one execution venue or single entity used for execution in their Order Execution Policy but the policy needs to include detail on how the single venue will achieve Best Execution by comparing to executions that could be received from using alternative venues. This analysis must be supported by data and information gathered from the market. 13

14 BEST EXECUTION UNDER MiFID II Definition Bloomberg Solution Scope Best Execution Reporting Execution Policy Monitoring Obligations 14

15 Monitoring Obligations BEST EXECUTION Under MiFID II, firms are required to monitor the effectiveness of their execution policy on a regular basis in order to identify and, where appropriate, correct any deficiencies. This monitoring is being emphasised by ESMA, who cites that, upon request, the regulators can ask firm to demonstrate that they have executed their orders in accordance with their execution policy in addition to their general compliance with the Best Execution obligation. Firms must measure and asses performance across all asset classes Firm need to assess whether the execution venues included in the policy provide the best possible result for the client or whether they need to make changes to their execution arrangements. 15

16 BEST EXECUTION UNDER MiFID II Definition Bloomberg Solution Scope Best Execution Reporting Execution Policy Monitoring Obligations 16

17 Reporting Obligations BEST EXECUTION Under MiFID II, firms have to summarise and make public on an annual basis, for each class of financial instrument, the top five execution venues in terms of trading volumes where they executed client orders in the preceding year as follows: Information must be segregate by client type. It must contain venue name and identifier for the top 5 venues with corresponding MIC codes. It must show the volume of client orders executed on each venue as a % of total executed volume and the number of client orders executed on each venue as a % of total executed orders. It must show the % of order that were passive and aggressive, and the % of orders that were directed to a specific venue by the client prior to execution of the order. It must indicate whether it has executed an average of <1 trade per business day in the previous year in a class of financial instrument. 17

18 BEST EXECUTION Reporting Firms will be required to publish for each class of financial instruments, a summary of the analysis and conclusions drawn from its monitoring of the quality of execution. Information to be provided includes: The relative importance the firm gave to the execution factors of price, costs, speed, likelihood of execution or any other consideration when making assessments of the quality of execution; A description of any close links, conflicts of interests, and common ownerships with respect to any execution venues used to execute orders; A description of any specific arrangements with execution venues regarding payments, discounts, rebates or non-monetary benefits received; An explanation of the factors that led to a change in the list of execution venues listed in the firm s policy; An explanation of how order execution differs according to client categorisation; An explanation of when other criteria were given precedence over immediate price and cost when executing retail client orders and how these other criteria were instrumental in delivering the best possible result in terms of the total consideration to the client; An explanation of how the investment firm has used any data or tools relating to the quality of execution. An explanation of how the investment firm has used, if applicable, output of a consolidated tape provider which will allow for the development of enhanced measures of execution quality or any other algorithms used to optimise and assess execution performances. 18

19 BEST EXECUTION UNDER MiFID II Definition Bloomberg Solution Scope Best Execution Reporting Execution Policy Monitoring Obligations 19

20 BTCA Bloomberg Transaction Cost Analysis BTCA is uniquely positioned to assist firms with a comprehensive Best Execution solution for MiFID II: Multi-asset class coverage (Equities, Fixed Income, Derivatives and FX) Global team of specialists to support your firm with the implementation of Best Execution under MiFID II Ability to test your Order Execution Policy by allowing to analyze order execution performance through different angles and with different benchmarks tailored to each instrument type Fully-customizable application can assist with your Best Execution Monitoring and Reporting needs TCA Report View Sophisticated set of pre- and post-trade transaction-cost analytics TCA Exception Dashboard 20

21 BTCA Besides BTCA, Bloomberg provides several other analytical tools to analyse the life-cycle of a trade and assist with achieving Best Execution: Review and Evaluate Results (BTCA) Algo Selection xxx (Pre-Trade Tile and xxxxx Order Profiling) ( Pre-Trade Tile and Order Profiling) TCA<GO> can help you choose the optimal way to trade those difficult large orders or baskets that typically require manual handling. Real-Time TCA (RBLD) Order Profiling can help you determine the optimal participation to achieve best alpha capture. EMSX<GO> is a multi-asset class trading platform, that helps you manage your executions and allows you to seamlessly route orders to over 1300 brokers representing over 2800 algorithmic/dma, program, and cash trading destinations. TSOX<GO> allows you to route and execute fixed income orders, so you can quickly and efficiently manage your fixed income trades. 21

22 THANK YOU