DALTON STRATEGIC PARTNERSHIP LLP ORDER EXECUTION POLICY DECEMBER 2017 General Policy Information Dalton Strategic Partnership (DSP) invests in various asset classes as part of the investment management services which it provides to its clients, that is the funds and portfolios that DSP manages on a discretionary basis. In carrying out this activity we make discretionary investment decisions for our clients ( the funds ) and place orders with other entities for execution. The second Markets in Financial Instruments Directive ( MiFID II ), as implemented in the UK through the MiFID Delegated Regulations and the rules in COBS 11.2A of the FCA Handbook, requires all investment firms, when executing orders on behalf of clients, to take all sufficient steps to obtain the best possible result for their clients, taking into account all relevant execution factors. We have therefore established and implemented a best execution policy, setting out the most important and/or relevant factors that are taken into account, when complying with best execution obligations. The purpose of this document is to set out in detail DSP s execution arrangements and best execution policy. Scope This policy applies to Dalton Strategic Partnership LLP. An investment firm shall be deemed to have executed a transaction where it performs any of the following activities that result in a transaction: a) reception and transmission of orders in relation to one or more financial instruments; b) execution of orders on behalf of clients; c) dealing on own account; d) making an investment decision in accordance with a discretionary mandate given by a client; e) transfer of financial instruments to or from accounts. Full Obligation for Best Execution Responsibility for best execution applies to DSP when we are deemed to be executing a transaction. This will generally be the case when we execute investment decisions to deal on behalf of the funds: a) In markets where we request a broker or other liquidity provider to use his own capital (risk price) in providing liquidity for a trade by dealing as principal; (Equities, Fixed Income, OTC & Listed Derivatives and some types of Foreign Exchange transactions). Dalton Strategic Partnership LLP December 2017 1
b) In markets where we source natural liquidity by responding to a broker s advertised indication of interest (IOI); (Equities, Fixed Income, OTC & Listed Derivatives). c) Directly in the market as a participant in a Multi-Lateral Trading Facility (MTF); (Equities & Fixed Income). Shared Obligation for Best Execution Responsibility for best execution lies with not only DSP but also other entities we may trade with, as these may be subject to the MiFID II requirements on best execution. When we place orders on behalf of the funds we rely on brokers and other counterparties to execute orders on either an agency basis or alternatively as a Systematic Internaliser (SI). These entities then assume responsibility for best execution. This includes orders placed with other entities by DSP via proprietary algorithmic trading. In this circumstance, DSP must ensure that those executing entities have execution arrangements in place that allow DSP to meet its best execution requirement. DSP is then responsible for oversight and monitoring of the execution quality of the broker or other counterparty executing the relevant transactions. Order Placing Where DSP places orders on behalf of the funds it must ensure that orders are: actioned promptly; accurately recorded and allocated; and executed sequentially unless the characteristics of the order or prevailing market conditions make this impracticable, or the interests of the client require otherwise. The execution process, from order inception through to final settlement, is designed to obtain the best possible result for the client. This process is as follows: 1. The DSP Portfolio manager ( PM ) raises and records an investment decision via the firm s Order Management System (OMS). 2. Order is accepted by the DSP Dealing Team ( DT ) into the Execution Management System ( EMS ) after it has passed all automated compliance checks. 3. DT select venue/broker in line with execution strategy and venue selection criteria detailed below. 4. Trade execution fills feedback automatically to EMS/OMS via fix. 5. Upon completion orders are allocated and booked to the relevant accounts for settlement. When PMs have no access to the OMS, orders can be sent to the DT via email copying, in compliance. When these types of orders are placed out of office hours, the DT will place the order directly to a broker s execution desk and recording into systems as soon as practicable. In limited circumstances the PM may place an order directly with an execution venue. Execution Factors When providing execution services to the funds, we must act in accordance with the best interests of each fund. We take all sufficient steps to obtain the best possible result ( best execution ) for the funds taking into account the following factors: price, costs (implicit and explicit), size, Dalton Strategic Partnership LLP December 2017 2
speed, likelihood of execution, likelihood of settlement, the nature of the order, the ability to retain anonymity in the market, (and limiting information leakage); the characteristics of the Funds including the professional client categorisation The relative importance of each of these factors within our execution process will vary depending upon a number of criteria, being: 1. the investment intent of the portfolio manager who created the order at DSP; 2. the characteristics of financial instruments that are the subject of that order; and 3. the characteristics of the execution venues to which that order can be directed. Each order is unique in its characteristics with market conditions never constant. A further factor relevant to best execution is counterparty risk, particularly in the case of instruments which are not settled by delivery versus payment; DSP s credit risk assessment of counterparties may have an impact on our selection of the trading counterparty. The relative importance of these execution factors is therefore variable. However, in most transactions, a combination of total consideration (price plus implicit and explicit costs) and size are usually the most relevant best execution factors. Regulatory requirements provide that best execution does not demand that firms achieve the best possible result with each individual order, but that all sufficient steps should be taken to ensure intended execution outcomes are achieved on an ongoing basis. Consequently our policy is to have a process which ensures that every client order is treated in a way that maximises the chance of getting the best outcomes when trading. Execution Venue Selection Selection of a venue for the execution of an order will be based upon the Execution Factors referred to above. Our policy is to access market liquidity via various methods that offer the potential for DSP to obtain the best possible result with respect to the orders on a consistent basis. We are not affiliated with any broker, bank or venue, allowing us flexibility of venue choice. As a general rule, we will try to identify venues which are sources of mid-point liquidity before entering an order into the lit market; this reduces the spread cost between bid and offer prices and helps reduce market impact as well as information leakage. We verify the execution arrangements in place at the execution venues of choice to ensure that DSP is able to offer best execution to its clients. Our approved trading venues include: Brokers (who in turn will access the market through a venue of their choice) Regulated markets and recognised investment exchanges Electronic crossing networks, such as Liquidnet and ITG Posit Multilateral trading facilities (MTF s), such as Chi-X and Turquoise Systematic Internalisers (SI s), who are primarily bilateral (client vs. house) execution venues with a distinct regulatory status and with enhanced pre- and post-trade transparency requirements Third party investment firms acting as market makers or other liquidity providers. This may include non-eu entities carrying out these functions. Typically, we will use these firms as they provide us with the ability to invest in certain collective investment schemes (pooled funds) Dalton Strategic Partnership LLP December 2017 3
1. Equities Venue Types Used : Brokers ; Regulated Markets ; Electronic Crossing Networks (ECN) ; Multilateral trading facilities (MTF) ; Systematic Internalisers (SI) ; Third party Investment Firms We consider an array of venues and entities, selecting only those we deem appropriate on a tradeby-trade basis when trading in equities on behalf of the funds. The three core routing categories are: i) High Touch Broking Desks These may be brokers who transact on DSP s behalf, on Regulated Markets, through both their own or third part MTF s, or as a Systematic Internaliser (either on a principal or agency basis). When we receive orders that require instant execution, the relative importance of speed and liquidity may be higher than that of price and cost. In these situations, our traders would weigh the benefit of using broker capital (principal risk trade), where the guarantee of liquidity outweighs the cost of discount or premium attached to that risk. In this scenario the negotiated price and size becomes more subjective and is dependent on the level of risk the broker is comfortable with. We may use Program Desks when investing new money for the funds, dealing with redemptions or implementing asset allocation changes. When trading in multiple securities for one or more funds simultaneously, a Program Trade may be the more efficient, controlled and cost effective way of transacting. Savings result primarily from lower commission rates. When executing a risk Program Trade, we generally ask two or more brokers to compete for the business. In times of extreme volatility we may use high touch brokers as an additional order management resource. ii) Algorithmic Execution Providers These are orders traded electronically, in line with certain parameters, (e.g. specified target percent of volume) via a variety of brokers proprietary platforms. We use algorithmic trading primarily to keep execution costs down, retaining order control and fill transparency. We select our brokers for algorithmic trading based on previous execution performance, the transparency of their order handling process and the quality of the general service we receive. iii) Independent Electronic Crossing Networks (e.g. Liquidnet/ITG Posit) When we have large single stock orders to transact, particularly those deemed Large-In-Scale (LIS), we typically use MTFs to find a block-sized match with a natural counter trade. The negotiated price will be based around the prevailing best bid and offer price on the primary market, usually deal at the mid of these two prices. The relative importance of size is a key factor, LIS trades being exempt from MIFID II dark pool caps. Furthermore dealing at the mid price improves spread capture. Dalton Strategic Partnership LLP December 2017 4
2. Exchange Traded and OTC Derivatives Venue Types Used : Brokers ; Regulated Markets ; Multilateral trading facilities (MTF) DSP transacts in exchange-traded derivative instruments on behalf of the funds to hedge against market risk, and to gain exposure to underlying assets. Listed derivatives are in the majority of cases not fungible, and DSP s choice of Execution Venue may therefore be limited. The decision to deal on a particular exchange may therefore be based primarily on the fact that there are no alternative sources of dealing in the products being traded. For example, a PM generates an order in the FTSE- 100 Index future, DSP has no alternative than to transact, via an intermediary, on ICE Futures Europe as this is currently the only venue for that product. Where there is only one execution venue then time and price of execution will be the highest ranked execution factor. Size or order and liquidity will determine whether we access the relevant exchange via high touch, broker algorithm or RFQ (Request for Quote). DSP may transact in over-the-counter (OTC) derivatives on behalf of the funds either when we wish to gain exposure to an underlying asset to which there is no listed equivalent, or when pricing/liquidity may be enhanced. Dalton Strategic Partnership LLP December 2017 5
3. Fixed Income Venue Types Used : Brokers ; Regulated Markets ; Electronic Crossing Networks (ECN) ; Multilateral trading facilities (MTF) As over the counter (OTC) products are not executed on any exchange, it is important we have a sufficient list of counterparties available for us to source the liquidity we require. The choice of counterparty and strategy for trading will be determined by the asset class involved. Where we trade more liquid instruments, such as G10 sovereign bonds or some higher rated corporate bonds, we may execute electronically using a Request For Quote model (asking multiple counterparties to quote, with the best price securing the order). In general, use of these venues essentially performs the price discovery function. For transactions that are not executed using an online, auction-type venue, DSP will use reasonably available and relevant sources of price discovery, including, but not limited to, market transaction prices (e.g. TRACE data) on historical or comparable financial instruments; quotes for, or yields on, historical or a comparable financial instrument; third party pricing vendor prices (viewed with current day market colour) and external or internal pricing models, to establish the best price. Quotes generally should be obtained from more than one counterparty as part of the price discovery process; however, this is not always possible or desirable. In certain markets, attempting to obtain multiple quotes could lead to information leakage and consequently have a negative impact on obtaining best execution. DSP will consider whether multiple quotes can or should be obtained depending on the security type, the security to be traded, the size of the transaction and the prevailing market conditions. All derivatives must be traded under industry legal documentation. This means our choice of counterparty for trading interest rate swaps, inflation swaps, swaptions, credit default swaps and currency forward contracts is generally limited to those banks where the required documentation is in place. As with the process for bond trading detailed above, how we execute a derivatives trade will very much be dependent on the size of the transaction and the liquidity available. Dalton Strategic Partnership LLP December 2017 6
4. Foreign Exchange (FX) Venue Types Used : Brokers ; Regulated Markets Foreign Exchange trades are either conducted through our funds appointed custodian bank, or through a third party bank on DSP s approved broker list, with reference to market rates appropriate for the trade size. DSP undertakes an active negotiation process with regard to direct FX transactions it undertakes for the funds. All FX derivative transactions, as well as FX spot transactions that are ancillary to transactions in MiFID financial instruments, are in scope of the rules on best execution. In relation to other spot transactions, that are not in scope, undertaken as a result of investment decisions in accordance with DSP s discretionary mandate, DSP will nevertheless strive to achieve an optimal outcome for the funds. DSP shall not employ best execution or actively negotiate rates with regard to those indirect spot FX transactions which are undertaken for the funds by third parties such as the funds custodian. Indirect FX transactions are those undertaken without DSP s active involvement such as income repatriation and restricted currency trades. Dalton Strategic Partnership LLP December 2017 7
Monitoring and Review Arrangements The purpose of our monitoring programme is to firstly test the effectiveness of our overall execution arrangements and, secondly, to have oversight of our regulatory obligations on best execution. Our monitoring programme also includes the identification and assessment of the execution arrangements in place at the venues of choice. Through a combination of trade sample analysis and Transaction Cost Analysis, we seek to identify any trends or outliers against relevant benchmarks e.g. Implemantation Shortfall and Interval Volume-Weighted Average Price. i) Real-time Trade Monitoring The effectiveness of our order execution arrangements is monitored by the DSP Dealing Team on an ongoing basis. Once an order is in the market the dealing team will continuously monitor execution strategy in order to obtain the best possible outcome. ii) Post Trade Execution Quality Analysis DSP s Best Execution and Broker Review Committee formally reviews our trading effectiveness on a quarterly basis through broker and independent third party Transaction Cost Analysis. The Committee also reviews trade outliers, commission activity, counterparties, internal trading issues and industry best practice. The committee is comprised of senior management from several areas of DSP including: Trading, Portfolio Management, Legal and Compliance. The Committee subsequently refers its findings to the management board for their approval. iii) Broker Selection Our Policy is to take sufficient steps to determine, when placing an order with another entity to execute, that the entity has arrangements that will enable DSP to comply with the best execution obligation. The criteria to add a counterparty or broker to the Approved List is generally based on evaluation of a number of quantitative and qualitative factors that may include, but are not limited to: competitiveness of commission rates or spreads; promptness of execution; clearance and settlement capabilities; provision of delegated regulatory reporting; quality of service; willingness to commit capital; creditworthiness; and reputation; iv) Execution Policy The Policy is reviewed on an annual basis, to assess whether it is effectively designed to enable the firm to obtain the best possible result for the execution of its orders. This review will include consideration of: The inclusion of additional execution venues or entities; Dalton Strategic Partnership LLP December 2017 8
The factors that determine the choice of venues or entities in the best interest of the funds, including any execution fees, any potential non-monetary benefits attached to the execution services and fees charged by DSP to determine the overall cost-benefit for the funds; The removal of any existing execution venues or entities; and material changes to factors to ensure we continue to achieve best execution. The Policy will also be reviewed on the occurrence of a material change in our dealing arrangements or a material change in our underlying regulatory obligations. A material change means a significant event of an internal or external nature that could materially impact considerations of best execution such as cost, price, speed, likelihood of execution, likelihood of settlement, the ability to retain anonymity in the market, prevention of information leakage, size, nature or any other consideration relevant to the execution of the order. We will notify the funds of any material changes to our execution arrangements or the Policy. The addition or removal of a broker from our approved list would not typically be deemed a material change. Aggregation and Allocation Policy Orders received at the same time with the same instruction or limit may be aggregated and executed in block format. Normally this will work to the advantage of the funds concerned, by achieving a more advantageous price through benefits of scale and by not having separate market orders competing against each other and excessively impacting the price to the detriment of both funds. On some occasions such aggregation may be disadvantageous. Partially executed orders will be allocated on a pro rata basis among all accounts involved in the trade by the OMS automatically, subject to any price limits that dictate otherwise. New Issues The above policy applies equally to the purchase of new issues. For portfolios where the underwriter s allocation of a new issue would result in the security constituting less than 0.25% of a fund s Net Asset Value, the portfolio manager may exercise best judgment in allocating securities. Crosses Crosses executed between funds run by the same fund manager are to be effected at mid market price or in certain scenarios, described below, at the day s closing price. Those executed between customers managed by separate portfolio managers are crossed at a price agreed by the managers which is within the bid offer spread at that time. All crosses must be passed through an external broker unless approved by the Compliance Officer. Crosses are transactions and orders that are placed with external brokers independently and are therefore treated in the same way a every other order for the purpose of best execution. Additionally, a portfolio manager managing multiple funds within the same strategy may (in order to manage cash or for other reasons) wish to increase positions in one fund and decrease positions in another. In this situation, it is may be appropriate to arrange for cross trades to be struck at market closing prices. This achieves certainty of execution, consistency with the prices used on that day for the valuation of the relevant funds, and equality between the funds so that there is no performance gain or loss resulting from a rebalancing which was in the interests of both funds. Closing Auctions Orders submitted for a closing market auction must be limited to a price which is no greater than 1% differential from the indicative auction price at the time the order is instructed. Dalton Strategic Partnership LLP December 2017 9
Dealing Errors Dealing errors will be reviewed on a case by case basis to determine whether there is a material disadvantage to a fund, group of funds or an individual investor. When an error occurs the Dealing Team will, within 24 hours of its occurrence, complete and send a reporting form to the Compliance Officer and Chief Executive Officer who will determine independently whether there is a requirement for the Investment Manager to compensate the fund as well as any possible steps to ensure the error is not repeated. The Chief Executive Officer has ultimate discretion on the payment of compensation. The firm maintains professional indemnity insurance to mitigate the risk of a large error resulting in a significant compensation payment. Dalton Strategic Partnership LLP December 2017 10