On 22 April 2016, the Foreign Exchange Joint Standing Committee held an additional meeting at the PRA. The minutes of that meeting have now been published, noting an FCA presentation where certain observations were made on the application of best execution to FX derivative and spot transactions.
The minutes state:
“Edwin Schooling Latter (Financial Conduct Authority – “FCA”) noted that currently in the EU, and hence the UK, MiFID applies to all FX derivative transactions as well as those FX spot transactions that are ancillary to transactions in MiFID financial instruments. Therefore, these transactions were within the scope of MiFID and in particular the rules on best execution. This was also true when the firm was dealing as a principal, including where dealing with a “professional counterparty”, where the counterparty was placing “legitimate reliance” on the firm.
In relation to other FX spot transactions, the FCA considered that the obligations arising would vary according to the nature of the relationship between market participants. As a matter of practice, three broad types of role could be described: (i) Agent – acting on behalf of a client and thus executing transactions in line with their mandate, with a responsibility to use the firm’s efforts to secure an optimal outcome for the client – here “best execution” was an appropriate benchmark, even if, for transactions not within the scope of MiFID, there was not a MiFID best execution requirement; (ii) Principal – acting on one’s own behalf providing two-way quotes to clients with no obligation to execute the order until both parties are in agreement, where the client has the flexibility to seek other quotes and the Principal has no best execution requirements; and (iii) Principal with some discretion – where the client could be considered to have placed some legitimate reliance on the Principal and thus the Principal has corresponding obligations to try and achieve an optimal outcome for the client, for example as may be the case when managing stop-loss orders.”