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Execution of best execution

The FCA published on 31 July 2014 a Thematic Review on best execution and payment for order flow (PFOF).

PFOF arrangements compromise compliance with best execution requirement, a key concept of MiFID. The FCA found that some of the firms maintained PFOF arrangements with market makers, in contravention with the Finalised Guidance published in 2012. Accordingly, the FCA pulls a trick that could impress its predecessor: tightening things up and threatening to take enforcement action against the firms caught in flagrante delicto.

Compliance with the best execution requirement was found to be broadly insufficient for the firms covered by the review, including investment banks, CfD providers, wealth managers, brokers/interdealer brokers and retail banks. The rule requires the firms to take all reasonable steps to obtain the best possible result, by taking into account price, costs, speed, likelihood of execution and settlement, size, nature and any other relevant consideration.

In 2009, the FSA conducted a similar review and reached similar conclusions. No material progress was achieved, while already more stringent rules are introduced in MiFID II. It will not suffice to take “reasonable steps”, firms will be bound to take “all sufficient steps” to achieve best execution. In addition, frequent monitoring and publishing of the quality of executions would ensure that the regulatory objectives are met.

These new transparency requirements are more likely to enable a major breakthrough, since clients will be able to assess the past performance of the firms concerning best execution, much like for asset managers.  As was recognised by the firms during the review, clients would simply switch to the competitor if they are not satisfied with the execution.

Meanwhile, the heat will come from the regulator. The firms who participated in the review should expect to receive individual feedback and a request to take immediate action.

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