Esma Highlights Low Levels of Best Execution

Terry Flanagan

The European Securities and Markets Authority found that the lack of a consolidated tape for the region contributed to the low level of implementation of best execution regulations.

Esma reviewed national regulators to find out how they supervise and enforce the MiFID provisions relating to investment firms’ obligation to provide the best possible result for their clients when executing their orders. The regulator found that the level of implementation and supervisory practices by national regulators is relatively low.

Steven Maijoor, chair of Esma, said in a statement: “The overall findings in this report show that the standard of supervision to ensure the implementation of MiFID’s best execution requirements falls short of its aim of ensuring that retail investors receive the best outcome when trading securities. A number of factors, including differing views on the application of the best execution requirements, lack of supervisory focus, insufficient resources and market structure issues have contributed to the current situation.”

Esma said the objective of the MiFID regulation was to create an environment where trading venues and executing venues compete among each other and investors to obtain the best execution.

The study said: “The best execution of orders invariably seems to be interpreted in terms of best price and not with regard to the analysis of the other execution factors, even in markets for which there is a certain level of dispersion and where several execution venues exist.”

The regulator said one of the reasons for the lack of comprehensive supervision could be the lack of easily available information on the price of the orders executed at the various venues. “In other words, the lack of a European “consolidated tape” (or better consolidation of information on prices on the different venues) seems to be an issue when it comes to the monitoring of best execution and even when sample of transactions are reviewed the proxy market approach is still necessary,” Esma added .

However MiFID II does not require a consolidated tape and does not set out major changes to the best execution requirements, except to enhance the information given to clients on their execution policy and providing information about the venues where orders are send for execution.

Verena Ross, executive director, Esma said in a speech at ABA/Law Society Capital Markets Conference in London today that MiFID has increased competition and enhanced investor protection within the EU since 2007 and that trade execution and reporting has resulted in profound changes to markets, their structures and the market infrastructures. She said this will be continued by MiFID II which also aims to increase transparency in more financial instruments.

“When developing technical standards and advice ESMA needs therefore to ensure that pre- and post-trade transparency for equity, equity-like and non-equity instruments is increased, in particular for those instruments, such as derivatives, that are still far from being traded in a fully transparent market,” she added .

Ross said the the concept of a ‘liquid market’ plays an important role in MiFID II since only instruments with a liquid market will be subject to real-time trade transparency. Ross said: “For instruments not having a liquid market, MiFID II provides for the possibility to waive pre-trade transparency and to grant deferral from post-trade transparency for transactions in such instruments.”

ESMA proposes to use the average frequency and size of transactions as the main criteria to determine a liquid market. Most respondents to the consultation supported this proposal.

Ross also warned that although the MiFID comes into effect in 2017 firms need to start preparing now as the transition phase has already started.

“This gives you just one year to get ready for MiFID II, to adjust your internal processes and systems, to train staff, and to inform your clients. So, in effect, time is already short and the deadlines to get yourselves and your firms ready are fast approaching,” she said.

Dan Gavin, director of product management of Eze Software Group, told Markets Media that clients had learnt that it is better to start preparing for new regulations as early as possible from the implementation of the Dodd-Frank Act in the US.

“In Europe we are starting to have conversations about their execution platforms and FCM relationships,” he added. “There is a sense of urgency as people realise the new regulations are here to stay.”

Gavin said clients are integrating workflows for over-the-counter products into the same order management systems as the listed environment as more OTC products move into clearing, and looking to integrate other asset classes such as foreign exchange, but particularly fixed income.

“We are seeing increased requests for foreign exchange, but that is at a snails pace compared to credit and rates, he added. “Some clients are realising their internal processes are no longer sufficient while others are taking the opportunity review their OMS provider.”

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