Back to the Future: Best Execution Rears its Head as FCA and ESMA Review Policies

It’s not just smells and memories that can transport people back in time; the phrase “best execution” is surely one that will elicit feelings of time travelling in some people as regulators dust off the rulebooks.

Best execution was big news 10-11 years ago, which spurred a whole cottage industry of analytics and data providers to spring up, some of whom still exist today. But very few are actually doing what they set out to do a decade ago, which is to provide a way of measuring and proving that those with fiduciary duties were doing their utmost to secure the best possible outcomes for their clients.

As a result it might have come as a surprise to some that recent reports suggest that the UK’s Financial Conduct Authority (FCA) is asking large wholesale institutions on this very topic, specifically, collecting information about the various approaches firms take towards best execution. These include “volume of orders they allocate to trading clients on various trading venues,” according to the article that also suggested that the FCA would publish a report about its findings around best execution and how various firms with different business models approach the matter.

This all comes as a bit of a surprise after years of silence. The last time the FCA publicly talked about best execution was in 2017, as part of its thematic review, which found that few firms had appropriate strategies for ensuring outcomes for clients and that there was much room for improvement overall.

Meanwhile, in the European Union, the European Securities and Markets Authority (ESMA) published a consultation paper on order execution policies in July last year as part of its mandate to amend MiFID II. Member States have until September this year to adopt ESMA’s recommendations.

The regulator is suggesting that firms should pre-select the venues eligible for client order execution per class of financial instruments and per category of client, as well as noting that some requirements under the best execution regime (e.g. monitoring and reviewing) can also be carried out by third parties.

It is additionally saying that service providers should also obtain the best result for their clients when executing client orders based on “own account” deals. Law firm Ashurst said in a piece last year that ESMA’s review identified that some firms and order execution policies revealed shortcomings.

The final report from ESMA is due in March, detailing the regulator’s final thinking on order execution policies, including when dealing on own account on behalf of the client, and managing conflicts of interest when they arise.

The FCA, meanwhile, remains tight-lipped about its thoughts, until further notice. But that might not be too much longer.

All of this is making The Full FX wonder whether it’s time to dust off the best execution bingo and settle in for a year or two of panels debating whether best execution is or is not, indeed, just best price. Or maybe someone will deploy some sort of an AI to finally settle the argument. Either way, watch this space!