MiFID II Best Execution: Ensuring Optimal Order Execution

Best execution under Article 27 MiFID II requires investment firms to take all sufficient steps to obtain the best possible result for clients when executing orders. Assessment considers multiple factors: price, costs, speed, likelihood of execution and settlement, size, and nature of the order. For retail client orders, the total consideration (instrument price plus execution costs) takes priority. Compared to MiFID I, the standard was raised from reasonable steps to all sufficient steps.

A best execution policy (order execution policy) under MiFID II must include, for each class of financial instruments: the execution venues used, the factors affecting the choice of execution venue, the relative weighting of those factors, and a description of procedures for monitoring execution quality. The policy must be disclosed to clients before order execution and requires their consent. An annual review of execution arrangements and principles is mandatory.

RTS 27 governed execution venue transparency requirements on execution quality. RTS 28 required investment firms to annually disclose their top 5 execution venues by trading volume per class of financial instruments, along with information on the execution quality obtained. Under the MiFID II review, RTS 28 reports have been discontinued, as ESMA found they were rarely used by investors. Instead, new, more practical requirements for execution policies and their monitoring are being introduced.

Execution venue selection under MiFID II considers multiple factors: the price of the financial instrument, direct and indirect execution costs, speed of execution, likelihood of execution and settlement, order size, and nature of the order. The relative importance of these factors depends on client classification (retail or professional), the type of financial instrument, and the available execution venues.

Ongoing monitoring of order execution quality includes both ex-ante and ex-post controls. Firms must regularly verify that execution venues listed in their execution policy actually deliver the best possible result. This includes: systematic comparison of achieved execution prices against reference prices, analysis of execution speed and settlement rates, review when new execution venues emerge, and the annual comprehensive review of all execution arrangements and principles.

The MiFID II review (Updated MiFID/MiFIR, effective since March 2024) introduces significant changes: the RTS 28 obligation for annual top 5 venue reporting is discontinued, as the reports were deemed of limited value. Instead, ESMA imposes higher requirements on execution policy quality – policies must be more specific and less generic. Firms must also consider new aspects in their reviews, including the emergence of new execution venues and new functionalities of existing venues.

ADVISORI supports investment firms with the complete implementation of best execution requirements: from gap analysis of existing processes, through drafting or revising the execution policy, building a monitoring framework for ongoing quality assurance, to implementing the required reporting. Our consultants bring experience from over 520 projects in the regulatory space and support you during supervisory examinations and adaptation to new ESMA requirements.