Did the Removal of RTS 27 and RTS 28 Reporting Requirements Weaken MiFID II's Best Execution Mandate? ▴ Question

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Concept

The question of whether the discontinuation of Regulatory Technical Standards (RTS) 27 and 28 has compromised the best execution mandate of the second Markets in Financial Instruments Directive (MiFID II) is a matter of significant debate within the financial system. At its heart, the best execution principle is an explicit requirement for investment firms to secure the most favorable terms for their clients when executing orders. This obligation considers a range of factors beyond mere price, including costs, speed, and the likelihood of execution and settlement. The original architecture of MiFID II envisioned RTS 27 and RTS 28 as foundational pillars of transparency, designed to provide the raw data necessary for this verification.

RTS 27 required execution venues ▴ such as stock exchanges and multilateral trading facilities ▴ to publish quarterly reports detailing the quality of execution achieved on their platforms. These reports were granular, breaking down data by financial instrument and covering aspects like price, costs, and likelihood of execution. Concurrently, RTS 28 mandated that investment firms annually disclose the top five execution venues they used for each class of financial instrument, along with a qualitative assessment of the execution quality obtained. The synergy between these two reporting streams was intended to create a feedback loop of public accountability, empowering clients and regulators to scrutinize execution performance.

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The Intended Transparency Framework

The logic underpinning the RTS 27 and 28 regime was one of radical transparency. By mandating the public disclosure of standardized execution quality data, the framework was designed to achieve several objectives. First, it aimed to equip investors with the necessary information to make informed judgments about where their orders were being routed and the quality of the outcomes.

Second, it was intended to foster a competitive environment among execution venues and brokers, who would be compelled to improve their offerings under the glare of public scrutiny. The reports were meant to be the empirical bedrock upon which the entire best execution edifice was built, transforming an abstract obligation into a verifiable, data-driven process.

However, the practical reality of this framework proved to be far more complex than its theoretical design. The sheer volume and technical nature of the data contained in RTS 27 reports made them exceedingly difficult for most end-users, particularly retail investors, to interpret. Feedback from market stakeholders consistently highlighted that the reports were rarely read and failed to provide a basis for meaningful comparisons. This gap between intent and utility became a central argument for the eventual removal of these reporting obligations, raising profound questions about the true nature of effective transparency in financial markets.

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Strategy

The strategic shift following the removal of RTS 27 and 28 reporting represents a fundamental recalibration of how best execution is demonstrated and monitored. The decision to eliminate these requirements stemmed from a widespread consensus that the reports were failing in their primary objective ▴ to provide clear, comparable data for assessing execution quality. The European Securities and Markets Authority (ESMA) and other national competent authorities (NCAs) acknowledged that the reports were burdensome to produce and of limited practical use to investors. This has precipitated a move away from a reliance on standardized public disclosures toward a more principles-based approach, where the onus is on firms to develop robust internal methodologies for evidencing best execution.

The discontinuation of RTS 27 and 28 has shifted the focus of best execution from public data comparison to the strength of a firm’s internal monitoring and control frameworks.

This new landscape does not diminish the importance of the best execution mandate itself. On the contrary, regulators have been explicit in stating that the obligation for firms to achieve the best possible results for their clients remains fully intact. The strategic challenge for investment firms now lies in adapting their compliance and oversight functions to a world without the prescriptive reporting templates of RTS 27 and 28. This requires a greater investment in internal systems, sophisticated analytics, and qualitative assessments to fulfill their regulatory duties.

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A New Locus of Accountability

The removal of the reporting obligations has effectively relocated the center of accountability from public disclosure to internal governance. Investment firms can no longer point to a set of standardized reports as the primary evidence of their compliance. Instead, they must be prepared to demonstrate to regulators, and increasingly to their clients, that they have a comprehensive and effective best execution policy in place. This involves a multi-faceted strategy that incorporates several key elements:

Enhanced Transaction Cost Analysis (TCA) ▴ TCA has become an even more critical tool in the post-RTS 27/28 era. Firms are now expected to perform more sophisticated and tailored analyses of their execution costs, comparing their performance against a range of benchmarks and metrics.
Qualitative Assessments ▴ The qualitative summary that was part of the RTS 28 report remains a vital component of a firm’s best execution strategy. Firms must be able to articulate the rationale behind their choice of execution venues and strategies, taking into account all relevant factors.
Internal Data and Monitoring ▴ With the disappearance of standardized public data, firms must rely more heavily on their own internal data and monitoring capabilities. This requires robust systems for capturing, storing, and analyzing trade data to identify any deficiencies in their execution arrangements.

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Comparative Analysis of Best Execution Evidence

The table below illustrates the strategic shift in how best execution is evidenced before and after the removal of RTS 27 and 28.

Evidentiary Component	Pre-Removal Era (with RTS 27/28)	Post-Removal Era
Primary Data Source	Publicly available RTS 27 and RTS 28 reports	Internal firm-specific trade and execution data
Basis of Comparison	Standardized, cross-venue and cross-firm report comparisons	Internal benchmarking, peer analysis, and customized TCA
Regulatory Focus	Compliance with reporting templates and deadlines	Effectiveness of internal policies, procedures, and governance
Client Communication	Provision of RTS 28 reports	More bespoke reporting and qualitative explanations of execution strategy

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Execution

In the absence of the prescriptive RTS 27 and 28 reporting framework, the execution of the best execution mandate has become a more dynamic and demanding process for investment firms. The core obligation has not been diluted; rather, the methodology for demonstrating compliance has evolved. Firms must now construct and maintain a more sophisticated and evidence-based internal framework that proves they are consistently seeking the best possible outcomes for their clients. This requires a significant focus on data, analytics, and governance, moving beyond a simple box-ticking exercise.

Effective execution of the best execution mandate now hinges on a firm’s ability to integrate quantitative analysis with qualitative judgment in a demonstrable way.

The operational reality is that firms must now be their own data providers and analysts. They need to invest in the systems and expertise required to perform deep dives into their own order flow and execution quality. This involves not only capturing the relevant data points but also developing the analytical capabilities to interpret that data in a meaningful way. The focus has shifted from producing reports for public consumption to generating actionable intelligence for internal oversight and regulatory scrutiny.

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The Modern Best Execution Framework

A robust best execution framework in the post-RTS 27/28 world is built on several key pillars. These pillars work in concert to provide a holistic view of execution quality and to ensure that firms are meeting their obligations to their clients.

Comprehensive Data Capture ▴ Firms must have the ability to capture a wide range of data for each client order. This includes not only the price and costs of execution but also data on the speed of execution, the likelihood of execution, and any other relevant factors.
Advanced Analytics and TCA ▴ The use of sophisticated Transaction Cost Analysis (TCA) is now non-negotiable. Firms must be able to benchmark their execution performance against a variety of metrics, including arrival price, volume-weighted average price (VWAP), and implementation shortfall.
Effective Governance and Oversight ▴ A clear governance structure is essential for ensuring that the best execution policy is being followed. This includes regular reviews of execution arrangements, monitoring of execution quality, and a process for addressing any deficiencies that are identified.
Qualitative Justification ▴ Firms must be able to provide a clear and compelling qualitative justification for their execution strategies. This includes explaining why they have chosen particular execution venues and how their approach is designed to achieve the best possible results for their clients.

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Key Metrics in the Modern TCA Toolkit

The following table outlines some of the key metrics that firms are now using to measure and monitor their execution quality. This is not an exhaustive list, but it provides a sense of the level of detail and sophistication that is now required.

Metric	Description	Purpose in Best Execution Analysis
Implementation Shortfall	The difference between the value of a hypothetical portfolio based on the decision price and the value of the actual portfolio after the trade is completed.	Provides a comprehensive measure of total trading costs, including both explicit costs (commissions, fees) and implicit costs (market impact, delay costs).
Arrival Price Benchmark	Compares the execution price to the market price at the time the order was received by the trading desk.	Measures the market impact and opportunity cost of a trade, isolating the performance of the trading desk.
VWAP Benchmark	Compares the average execution price to the volume-weighted average price of the security over the trading day.	Assesses how well a trade was executed relative to the overall market activity for that day. Useful for less urgent orders.
Reversion Analysis	Analyzes the price movement of a security after a trade is executed to determine if the trade had a temporary or permanent market impact.	Helps to distinguish between information leakage and temporary liquidity effects, providing insight into the quality of the execution strategy.

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References

European Securities and Markets Authority. (2024). Final Report ▴ Draft regulatory technical standards on the content and format of investment firms’ order execution policies. ESMA70-708036281-1014.
DLA Piper. (2024, February 20). ESMA publishes statement on reporting requirements under RTS 28 of MiFID II.
TRAction Fintech. (2024, February 14). RTS 27 and 28 ▴ The 2024 Status of These Reports in UK and EU.
Malta Financial Services Authority. (2024, February 19). The European Securities and Markets Authority (“ESMA”) Clarifies Certain Best Execution Reporting Requirements under MiFID II. MFSA Circular.
European Securities and Markets Authority. (2024, February 13). ESMA clarifies certain best execution reporting requirements under MiFID II. ESMA70-708036281-10214.

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Reflection

The transition away from a prescriptive, report-based system of best execution oversight toward a more principles-driven model presents both a challenge and an opportunity. While the removal of RTS 27 and 28 may have diminished the public-facing data available for cross-firm comparisons, it has simultaneously elevated the importance of a firm’s internal analytical capabilities and governance structures. The mandate for best execution has not been weakened; its center of gravity has simply shifted inward.

This evolution compels firms to look beyond mere compliance and to cultivate a genuine culture of execution excellence. The focus now is on building a robust, evidence-based framework that can withstand the scrutiny of regulators and the demands of sophisticated clients. The firms that will thrive in this new environment are those that view best execution not as a regulatory burden, but as a source of competitive advantage and a cornerstone of client trust. The ultimate measure of success will be found in the quality of the outcomes they deliver, a truth that no report, however detailed, could ever fully capture.