On 24 September 2021, the European Securities and Markets Authority (ESMA) issued a consultation paper setting out proposals for improvements to the MiFID II framework on best execution reports.
Article 27 of MiFID II sets out best execution requirements which aim at ensuring that investment firms take all sufficient steps to obtain, when executing client orders, the ‘best possible result’ for their clients.
Article 27(10)(a) requires ESMA to develop draft regulatory standards to determine the specific content, the format and the periodicity of data relating to the quality of execution to be published in accordance with Article 27(3), taking into account the type of execution venue and the type of financial instrument concerned. Additionally, Article 27(6) requires ESMA to develop draft regulatory technical standards (RTS) to determine the content and the format of information to be published by investment firms in accordance with Article 27(6).
On the basis of these requirements, ESMA has adopted the relevant technical standards which are commonly known as RTSs 27 and 28 and these lay down the reporting requirements intended to achieve the aforementioned best execution objectives. In particular under:
- RTS 27 execution venues (“venues”) have to provide quarterly comprehensive sets of relevant data to allow investment firms, professional investors and the public to assess and understand the quality of execution achieved on the venue.
- RTS 28 investment firms (“firms”) must publish annual reports to enable the public and investors to evaluate the quality of a firm’s execution practices.
However, in the course of the application of the MiFID II framework, issues with the best execution reporting requirements have been identified, for example in media reports and in ESMA’s exchange with stakeholders. The issues are primarily related to RTS 27 (e.g. relating to venues’ publication of lengthy reports and market participants’ limited use of this information for execution quality assessments) and to lesser extent also relating to RTS 28 (e.g. limited use of reported information).
The consultation paper that ESMA has published seeks to receive technical input from market participants on how a reviewed best execution reporting regime could look like. Its outcome will not lead to any immediate changes to RTSs 27 and 28 but it will be taken into account by ESMA in supporting the European Commission in its assessment of the adequacy of the best execution reporting obligations and any subsequent technical work.
The deadline for comments on the consultation paper is 23 December 2021. ESMA will consider the responses it receives to this consultation paper in Q4 2021 and plans to send proposals to the European Commission, if needed, in the first half of 2022.