Best Execution under updated MIFID - ESMA thinks order execution policies are generic and not used 

On 16 July 2024, ESMA published a consultation paper on order execution policies, in line with its mandate under the Directive amending MiFID II (Updated MIFID), which was finalised along with Regulation amending MiFIR (Updated MiFIR) in March 2024 (see our briefing here). Updated MiFIR and Updated MiFID entered into force on 29 March 2024, with a deadline of 29 September 2025 for Member States to have published measures to transpose Updated MiFID.

The measures proposed by ESMA will result in amendments needing to be made to sections of existing policies (e.g. specific instructions; monitoring and review of policy). 

ESMA is suggesting that firms should pre-select the venues eligible for client order execution per class of financial instruments and per category of client. ESMA is also suggesting that firms should also obtain the best result for their clients when executing client order based on own account deals. ESMA has also explicitly stated that some requirements under the best execution regime (e.g. monitoring and reviewing) can also be carried out by third parties.  

The deadline for comments is 16 October 2024. ESMA expects to prepare the final report containing draft technical standards to be submitted to the European Commission for endorsement by 29 December 2024.

Areas in need of attention according to ESMA

Research carried out by ESMA in relation to best execution and order execution policies has revealed certain shortcomings, such as firms: not sufficiently documenting how they justify their execution venue choice; not properly demonstrating that they executed client orders in accordance with their execution policies; and only publicly disclosing generic information about their order execution policy and steps taken to obtain the best possible result when executing client orders. ESMA also refers to the fragmented nature of EU securities market and how this may impact venue choice.

Updated MiFID introduces some changes to best execution, requiring ESMA to develop RTS on the criteria to be considered for the purpose of defining and assessing the order execution policy, taking into account whether orders are executed on behalf of retail or professional clients. The criteria are meant to include at least the following: factors determining the choice of execution venues to be included in the order execution policy; the frequency of assessing and updating the order execution policy; and how to identify classes of financial instruments.

Areas covered by the consultation

The establishment of an investment firm’s order execution policy

• Firms to include in their execution policies venues enabling best execution on a consistent basis. 
• Firms to select venue per class of financial instrument, per category of retail/professional clients and by accounting for further factors, including: different order frequencies and values for retail and professional clients; and whether the executed financial instruments are EU or non-EU instruments.
• Firms to categorise for each venue the information they plan to use for executing client order (to be used for each class of financial instruments where intending to offer order execution service).
• Firms using automatic order routing systems to describe the main characteristics of the system in order execution policy.

Requirements for the assessment of investment firms’ order execution policies 

• Firms to set out the frequency and methodology applied to in respect of their continuous or periodic monitoring in order execution policy.
• Monitoring can be delegated to a third-party, but firms would be required to assess the monitoring process set up by the third party.
• Firms' review of order execution policies and order execution arrangements to be done at least annually and to include certain aspects.
• Review would test whether execution venues in execution policies allow firms to obtain the best possible result for clients and factors to consider would include: the emergence of new execution venues; and new functionalities or execution services provided by venues.

Execution policies related to client instructions and execution of client orders through own account dealing

• Firms to set out in their order execution policies the arrangements for dealing appropriately with specific instructions from clients.
• Firms to specify the impact of instructions on the criteria of the venues selected for firms’ order execution and their ability to obtain the best possible result for the instructing client. Firms to define in their order execution policy how to differentiate between orders with and without specific client instructions.
• Order execution policies to set out arrangements for ensuring that firms only deal on own account when executing client orders where all of the following conditions are met: the order execution policy of the investment firm expressly provides for the option of executing client orders on own account; and executing client orders on own account provides the best possible result for clients.
• Order execution policies to adequately identify, prevent and manage the conflicts of interest related to: dealing on own account when executing client orders; and to ensure the fairness of the price proposed to the client when dealing on own account in OTC products.