Global Regulation Tomorrow

On 16 July 2024, the European Securities and Markets Authority (ESMA) published a consultation paper on draft technical standards specifying the criteria for how investment firms establish and assess the effectiveness of their order execution policies.

During its work related to the MIFID II best execution requirements and more profoundly by Member State competent authorities through their supervisory activities, the actual implementation of firms’ execution policies under MiFID II had shown shortcomings. In several EU jurisdictions it was observed that at least some firms, inter alia:

• Did not provide sufficiently documented analytical efforts to justify their choice of execution venues.
• Did not properly demonstrate that they executed client orders in accordance with their order execution policies.
• Disclosed publicly only rather generic information about their order execution policy and their steps taken to obtain the best possible result when executing client orders.

The Directive amending the Directive on markets in financial instruments (MiFID II review) entered into force on 29 March 2024. Article 1(4)(e) of the MiFID II review requires ESMA to develop regulatory technical standards (RTS) on the criteria for establishing and assessing the effectiveness of investment firms’ order execution policies. As such in the consultation paper ESMA is seeking input on:

• The establishment of an investment firm’s order execution policy. This includes the classification of financial instruments in which firms execute client orders and the initial selection of venues for the order execution policy.
• The investment firm’s procedures to monitor and regularly assess the effectiveness of its order execution arrangements and order execution policy.
• The investment firm’s execution of client orders through own account dealing.
• How an investment firm should deal with client instructions.

Next steps

The deadline for comments on the consultation is 16 October 2024.

ESMA will consider the feedback received to this consultation and expects to publish a final report and submit the draft technical standards to the European Commission for endorsement by 29 December 2024.