09.07.2020

FMSB: Review On Measuring FICC Execution Quality

The FICC Markets Standards Board (FMSB) has today published a Spotlight Review looking at the challenges in measuring quality of trade execution and how this varies across different market participants and segments.

While not a new concept, in the last four years there has been a significant focus on best execution and transaction cost analysis by both market participants and regulators.

As a result, measuring and evidencing trade execution quality has become critical to client servicing as well as to demonstrating ongoing compliance with investor protection regulations. A firm’s ability to do this well depends heavily on the quality of data available.

While the various regulatory requirements for measuring execution quality vary by jurisdiction and asset class, wholesale fixed income, currencies and commodities (FICC) markets face specific challenges in achieving high standards of transparency, openness and fairness. This Review explores the root cause of these challenges, highlights the progress made in regulation and market participants’ practices with regard to data reporting and best execution, and sets out key points of focus for firms in navigating these difficult waters.

This Review therefore examines the following topics:

• the observability of relevant data sources;

• the reliability and quality of data sources;

• variations in data observability and reliability across different products;

• obligations and priorities in measuring execution quality; and

• a role for industry standards.

This Spotlight Review is intended to benefit front office trade execution on the buy-side as well as within market makers, and those responsible for overseeing regulatory requirements in compliance and risk functions.

Mark Yallop, Chair of FMSB, said: “This Spotlight Review, the final in a series on market structure, looks at themes of best execution and transaction cost analysis (‘TCA’) that have grown in importance in recent years. It suggests that there may be benefits to agreeing broad best practices for measuring execution quality, both to better fulfil regulatory requirements and to achieve greater operational and cost efficiency. Drawing on themes already identified in earlier Spotlight Reviews, this study highlights the importance of ensuring good quality data – from the broadest, most reliable and most appropriate sources – in order to measure the quality of trade execution.”

Rupak Ghose, Senior Adviser at FMSB, said: “The series of four market structure Spotlight Reviews focused on emerging themes such as model risk in algorithmic trading, the critical role of data management, the changing surveillance environment and processes around measuring execution quality. A common theme throughout this series is the increasing importance of data quality and technology advancements, such as machine learning, in shaping the financial market landscape. Ensuring that governance and industry best practice keeps up with the rapid evolution of these trends is more important than ever in today’s complex financial system.”

This Spotlight Review is the fourth and final in a series that is collectively looking at issues of FICC market structure and the impact of regulatory and technological change on the fairness and effectiveness of wholesale markets.

Source: FMSB

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