Best execution: state of play for investment managers in the EU WFE Workshop on Market Structure and

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Best execution state of play for investment
managers in the EU WFE Workshop on Market
Structure and Statistics, World Federation of
Exchanges, Paris, 2nd December 2008

• Stéphane JANIN
• Director, Head of International Affairs Division

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Overview

• Best execution in MiFID
• Remaining major questions on best execution for
  investment managers
• Perspectives

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1. Best execution in MiFID (1/2)

• Markets in Financial Instruments Directive
  (MiFID)
• End of concentration rule requirement of
  best execution
• 2. But the definition of best execution is wide
  and vague
• Art. 21 Directive 2004/39/EC
•  Obligation to execute orders on terms most
  favourable to the client () investment firms
  must
• - take all reasonable steps
• - to obtain the best possible result for their
  clients
• - taking into account price, costs, speed,
  likelihood of execution and settlement, size,
  nature or any other consideration relevant to the
  execution of the order

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1. Best execution in MiFID (2/2)

• Best execution parameters to be taken into
  account (Art. 44 Dir. 2006/73/EC)
• - categorisation of the client (retail vs.
  non-retail)
• - characteristics of the clients order and
  relevant financial instruments
• - characteristics of the execution venue
• - in case of retail clients only price and
  costs related to execution
• Best execution is also required from investment
  managers when providing for portfolio management
  or reception/transmission of orders (Art. 45 Dir.
  2006/73/EC)
• even if softened to act in the best interests
  of clients

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2. Remaining major questions on MiFIDbest
execution for investment managers (1/3)

• 1. Investment managers are both clients and
  providers
• 2. As clients (for the service of execution of
  orders), they dont benefit from best execution
  as such (except if they ask for getting a retail
  status)
• 3. As providers (for the services of portfolio
  management or transmission of orders) they have
  to comply with a (softened) version of best
  execution vis-à-vis their own retail clients
• 4. As providers (for the service of collective
  management) they are not covered by MiFID

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2. Remaining major questions on MiFIDbest
execution for investment managers (2/3)

• 5. The issue for best execution regarding some
  financial instruments traded on OTC markets
• - some instruments are structurally traded on
  OTC markets (e.g. bonds)
• - where the market is organised by market-makers
• - and while no trade transparency is required
  for non-equities
• - therefore the level of information for
  investment managers is lowered as compared to the
  one of market-makers with which they trade
• which requirement for investment managers
  how to ensure best execution when there is no
  required trade transparency - which level of
  responsibility for investment managers??

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2. Remaining major questions on MiFIDbest
execution for investment managers (3/3)

• 6. Which organisation for management companies
• The best execution requirements were not clear
• For non-equity instruments traded on OTC markets
• For managers as compared to brokers
• But investment managers (among others) had to
  implement such requirements in their own
  organisations by 1st November 2007
• Different approaches followed by management
  companies all over the EU
• Some (big) ones set up dedicated internal
  execution platforms
• Many decided to invest in external information
  systems
• But uncertainties were not solved

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3. Perspectives

• Best execution for management companies as
  clients (exec. of orders)
• Will mainly depend on the power relationship
  between the management company and its broker
  still uncertainties on OTC markets (bonds)
  vis-à-vis market-makers
• Best execution for management companies vis-à-vis
  their own clients(portfolio management
  transmission of orders)
• obligation of means (i.e. best selection of
  brokers) rather than obligation of results (as
  usually no direct access to markets)
• 3. But remaining uncertainties would require
  reviewing the MiFID as soon as possible (e.g.
  meaning of best execution when no trade
  transparency?)

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• Thanks!
• Stéphane Janin
• Association Française de la Gestion financière
  (AFG French Investment Fund and Asset
  Management Association), 31 rue de Miromesnil,
  75008 Paris, s.janin_at_afg.asso.fr , 33 1 44 94 94
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