ESMA scales back best execution requirements

ESMA states “all sufficient steps” to be taken to obtain best execution, but not for every single client order.

The best execution requirement under MiFID II does not need to be obtained for clients on every single occasion, but firms will need to verify efforts on an “on-going basis”, according to the latest guidelines from Europe’s regulatory watchdog.

The European Securities and Markets Authority’s (ESMA) recent Q&A on MiFID II explained the ‘overarching requirement’ for best execution should not be interpreted as a requirement for every single client order.

Instead, ESMA said those executing on behalf of clients must verify “their execution arrangements work well throughout different stages of the order execution process.”

It added that all companies should take “appropriate remedial actions if any deficiencies are detected”, to prove they have taken “sufficient steps.”

ESMA looked to redefine best execution rules from MiFID I to MiFID II.

MiFID I required firms to take “all reasonable steps” to obtain the best possible result for clients, whereas MiFID II requires firms to take “all sufficient steps”.

The Q&A said that companies still remain under the same obligations to obtain the best possible results on a constant basis, but MiFID II’s “sufficient” steps “sets a higher bar for compliance than reasonable steps.”

Firms must still take into account price, costs, speed, likelihood of execution and settlement, size, nature or any other consideration relevant to execution of the order.