Best Execution Post-MiFID

Terry Flanagan

The Markets in Financial Instruments Directive (MiFID) has had far-reaching impact on trading firms since its adoption in 2007, and promises to have even greater impact once the revised version kicks in.

MiFID includes a directive on best execution, according to which all reasonable steps must be taken to achieve the best possible execution of client orders. It also established a three-tiered trading system classification consisting of regulated markets, multilateral trading facilities, and systematic internalizers. The revised version, called MiFID II, adds a fourth category, organized trading facilities or OTFs, which includes broker crossing networks and dark pools.

The transposition of MiFID into the laws of each EU country has resulted in the definition of a standard set of regulations aimed at developing innovation and competition in the financial markets.

In Italy, for example, Banca IMI’s Market Hub platform guarantees best execution and provides integrated access to over 70 domestic and international markets (stock, bonds and derivatives). Over 270 corporate clients (Italian and international) have taken advantage of these services.

“Market Hub is one of the most innovative solutions on the market in terms of providing integrated access to the financial markets as well as MiFID Compliant Best Execution,” said Gherardo Lenti Capoduri, head of Market Hub.

Market Hub offers best execution through its smart order routing service in both equities and fixed income. “In fixed income, it accesses multiple market venues and provides clients with liquidity on its systematic internalizer RetLots Exchange,” said Capoduri. “Market Hub clients trade over 20,000 bonds through a fully transparent and efficient electronic platform,”

RetLots Exchange (REX), one of Banca IMI’s execution venues, started out as an Organized Exchange System and, subsequent to the introduction of MiFID, was converted into a Systematic Internalizer. Associated parties can insert buy and sell orders which are automatically executed when they are compatible with the prices and the quantities placed in the market maker’s books.

MTS, one of Europe’s premier electronic fixed income markets, with average daily volumes exceeding 100 billion dollars, supports the full chain of pre-trade, trade execution and post-trade capabilities across cash, repo and institutional markets. The same services are being provided in the U.S. by MTS BondVision.

“The regulatory landscape continues to be an area of focus across our industry, with moves to bring more fixed income trading onto transparent, electronic platforms,” said Gabriele Frediani, head of markets at MTS. “Since its formation, 25 years ago, MTS has always operated an electronic platform and continues to work closely with our customers to develop solutions for the industry. For example, we have launched MTS Credit, a platform for non-government bonds, offering sponsored access through a prime bank alongside the more traditional single-dealer pages and ‘Request for Quote’ pages.”

The European Parliament is currently engaged in a “trialogue” on the EU Markets in Financial Instruments Directive (MiFID) with the European Council and the European Commission. Significant differences between the versions agreed by the bodies must be reconciled before the new regime is implemented. Uniform rules may not go into effect until 2015 or 2016, according to a report by Bloomberg Law.

The parliament has scheduled an indicative date of Dec. 10, 2013, to approve an agreed draft. Even once a final text is adopted, the European Securities and Markets Authority (ESMA) will then need to develop technical standards, which must be approved by the commission and may be subject to review by the parliament and the council, according to Bloomberg Law.

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