New standards for order execution under MiFID

At a glance

The European Commission has issued a new Delegated Regulation supplementing MiFID II (Directive 2014/65/EU), introducing updated Regulatory Technical Standards (RTS) on the establishment, implementation, and assessment of order execution policies for investment firms¹. The regulation repeals and replaces Delegated Regulations (EU) 2017/575 and (EU) 2017/576, incorporating lessons learned from the initial MiFID II framework and reflecting the ongoing development of the EU capital markets landscape.

Why? The overarching objective is to ensure that investment firms consistently achieve the best possible result for their clients when executing orders, and that their internal execution policies are robust, transparent, and subject to ongoing monitoring.

Who? The regulation applies to MiFID II-authorized investment firms executing client orders in financial instruments, including equities, bonds, derivatives, structured finance products, and emission allowances.

When? Considering the need to adjust order execution policy and procedures and related IT systems to become compliant, investment firms will have 18 months after the entry into force to implement the new requirements of this Regulation. What? The model described by the new standards announces a complete switch of philosophy: one will not anymore declare what the top five execution venues they work with are. Investment firms will have to determine what are the most favorable execution conditions for each type of trade (considering asset classes, client profile, and volume), and to evidence they are consistently applied.

A closer look

What will an effective order execution policy entail?

1. Establishment of a robust order execution policy

Investment firms must implement a comprehensive order execution policy that, among others:

• Identifies, for each class of financial instrument, the execution venues to which orders may be directed.
• Explains how the authorization status of execution venues is verified.
• Sets out the relative importance of key execution factors, including price, costs, speed, likelihood of execution and settlement, size, nature of the order, and use of automatic order routing.
• Demonstrates how these factors are weighted based on client category (retail or professional) and the order characteristics.
• Differentiates the order execution conditions applied when the client gives instructions and provides the appropriate level of information.
• Explains how best execution is achieved when dealing on own account and how conflict of interest are mitigated.
• Defines groups of classes and subclasses of financial instruments executed according to the same process (e.g., routed towards the same execution venue).
• Identifies the data providers used within the firm’s valuation systems. 

2. Monitoring periodic assessment of the effectiveness of the order execution policy

Investment firms must continuously monitor and regularly assess the effectiveness of their order execution policy by:

• Verifying that client orders are executed according to the established policy.
• Comparing execution prices against relevant data, including consolidated tape data where available.
• Testing, by asset class, whether the targeted execution quality is achieved consistently.
• Comparing outcomes obtained through selected execution venue with those available from alternative venues.
• Conducting at least annual reviews of the policy, and reassessing it whenever monitoring identifies deficiencies or material market changes arise, such as liquidity disruptions or the emergence of new execution venues. 

3. Transparency and comprehensive client information

Firms must “ensure that clients are informed in a clear and comprehensive manner on the way their orders will be executed” provide clients with a clear, accessible summary of their execution policy, including the list of execution venues used per instrument class.

These new RTS will also repeal the existing RTS requirements relating to:

• The publication by execution venues of data on execution quality;²  and The annual publication by investment firms of information on execution venues and execution quality.³

How Deloitte can help

Investment firms should anticipate the new requirements and take early steps to build a robust and efficient order execution framework by:

• Assessing gaps between the new RTS requirements and their current execution arrangements.
• Reviewing and updating your order execution policies and procedures.
• Designing an effective execution monitoring framework and adapting your related IT systems.
• Updating compliance monitoring plans to reflect the enhanced oversight and assessment obligations.

¹Commission delegated regulation (EU) .../... supplementing Directive 2014/65/EU of the European Parliament and of the Council with regard to regulatory technical standards specifying the criteria to be taken into account in establishing and assessing the effectiveness of order execution policies of investment firms and repealing Delegated Regulations (EU) 2017/575 and (EU) 2017/576
²Commission delegated regulation (EU) 2017/575 of 8 June 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council on markets in financial instruments with regard to regulatory technical standards concerning the data to be published by execution venues on the quality of execution of transactions
³Commission delegated regulation (EU) 2017/576 of 8 June 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council with regard to regulatory technical standards for the annual publication by investment firms of information on the identity of execution venues and on the quality of execution