How Can Firms Effectively Demonstrate Best Execution for Lis Trades without Rts 28 Reports?

Concept

The dissolution of the RTS 28 reporting mandate has been misinterpreted by some as a relaxation of regulatory oversight. This perspective is fundamentally flawed. The core principle of best execution was never about the report itself; it was, and remains, a foundational duty of care owed to a client. The removal of a prescriptive, static reporting format elevates the nature of this duty.

It shifts the operational imperative from a routine, and often unexamined, compliance filing to the construction of a dynamic, principles-based evidentiary framework. The Financial Conduct Authority (FCA) has not lowered the bar; it has changed the nature of the test. Firms are now compelled to move beyond rote compliance and architect a coherent, internal system capable of demonstrating, on demand, that every order was handled with the client’s best interests as the central organizing principle.

For Large-in-Scale (LIS) trades, this shift is particularly significant. The inherent illiquidity and market impact potential of these orders mean that a simple price metric was always an insufficient measure of execution quality. The true test lies in a qualitative and quantitative assessment of a range of competing priorities. The FCA’s enduring rules in the Conduct of Business Sourcebook (COBS) codify this, requiring firms to consider a matrix of execution factors ▴ price, costs, speed, and the likelihood of execution and settlement.

Demonstrating fidelity to this multi-vector obligation without the rigid structure of RTS 28 requires a more sophisticated approach ▴ one grounded in a firm’s own rigorously defined and consistently applied execution policy. The focus is no longer on public disclosure but on internal intellectual rigor and the creation of a defensible, auditable trail. This is a move from public bureaucracy to private accountability.

The core best execution obligation persists, demanding a robust internal framework for evidence over standardized public reporting.

This new paradigm requires firms to think like systems architects. The challenge is to design and implement an operational process that not only achieves best execution but also generates the evidence of that achievement as a natural output of the trading workflow. It involves integrating data sources, codifying decision-making logic, and establishing clear governance protocols. The absence of RTS 28 is not a vacuum; it is a design space, inviting firms to build a superior, proprietary system for managing and evidencing their fiduciary duties in a way that is far more meaningful than the legacy reporting it replaced.

Strategy

In an environment without prescriptive reporting standards, a firm’s strategy for demonstrating best execution must be anchored in two core components ▴ a comprehensive Order Execution Policy and a robust Transaction Cost Analysis (TCA) program. This is a strategic pivot from periodic, backward-looking reporting to continuous, real-time monitoring and ex-post validation. The Order Execution Policy serves as the constitutional document for the firm’s trading function, clearly articulating the methodologies used to satisfy the multi-factor requirements laid out by regulators. For LIS trades, this policy must be granular, detailing how the firm prioritizes and balances the competing execution factors based on order characteristics and prevailing market conditions.

The Dynamic Evidentiary Framework

A modern strategy treats the demonstration of best execution as an ongoing, data-driven process. It is a system designed to answer inquiries from clients or regulators with a complete and coherent body of evidence. This framework moves beyond simple compliance to become a source of competitive advantage, enabling the firm to refine its execution strategies over time. The table below contrasts the legacy RTS 28 approach with this more dynamic, internal system.

The Centrality of Multi-Factor TCA

Transaction Cost Analysis is the engine of the dynamic framework. For LIS trades, a generic TCA model is insufficient. The analysis must be tailored to the specific challenges of executing large blocks, where market impact is often the largest component of cost. The strategy must incorporate a three-stage analytical process:

• Pre-Trade Analysis ▴ This involves documenting the “why” before the “how.” Before an order is placed, the system should capture the market conditions, liquidity profile of the instrument, and the rationale for selecting a particular execution strategy or venue. This could include, for example, the justification for using a dark pool or initiating a Request for Quote (RFQ) process with specific counterparties.
• Intra-Trade Analysis ▴ This is the capture of real-time execution data. For an LIS trade executed via RFQ, this means systematically logging all quotes received, the time of receipt, and the identity of the quoting counterparty. This creates an irrefutable audit trail of the competitive environment at the moment of execution. For algorithmic trades, it means monitoring the order’s performance against a benchmark in real time.
• Post-Trade Analysis ▴ This is the final, quantitative assessment. Using metrics like implementation shortfall (the difference between the decision price and the final execution price), the firm can measure the total cost of execution, including explicit commissions and implicit market impact. This analysis should be conducted not just on an individual trade basis, but also aggregated over time to identify patterns in broker or venue performance.

This multi-stage TCA process provides a complete narrative for each LIS trade. It allows a firm to move beyond simply stating it achieved the best outcome and instead provides the structured data to prove it, satisfying the FCA’s requirement that firms be able to demonstrate their compliance upon request.

Execution

The execution of a best execution policy in the absence of RTS 28 is a matter of operationalizing the principles of evidence gathering. It requires the systematic integration of data capture and governance into the daily trading workflow. The goal is to create a robust, auditable record as a natural by-product of the execution process, rather than as a separate, manual task. This record must be sufficient to reconstruct the circumstances of any given LIS trade and justify the execution strategy chosen.

Operationalizing the Audit Trail

For every significant LIS trade, a detailed evidence file should be compiled. This file is the firm’s primary defense against any challenge to its execution quality. It should be structured around the key decision points in the trade lifecycle.

A critical component for many LIS trades, particularly in fixed income or OTC derivatives, is the Request for Quote (RFQ) process. Capturing the data from this process is non-negotiable.

Systematic logging of competing quotes and the rationale for venue selection forms the bedrock of a defensible best execution file.

The following table provides a template for the kind of data that should be captured for an RFQ-based LIS order, forming a concrete part of the audit trail:

Governance and Oversight

Demonstrating best execution is also a function of robust governance. A firm must have a formal structure for reviewing execution quality and holding traders and brokers accountable. This is typically achieved through a Best Execution Committee or a similar governance body.

The committee’s role is to move beyond individual transactions and assess the firm’s execution performance systemically. This involves a structured, periodic review process.

1. Data Aggregation ▴ On a quarterly basis, all post-trade TCA data is aggregated. Outliers ▴ trades with exceptionally high or low costs ▴ are flagged for specific review.
2. Broker and Venue Review ▴ The committee analyzes the performance of all execution venues and brokers used during the period. This analysis should be multi-faceted, considering not just price, but also factors like failure-to-settle rates and responsiveness during volatile periods.
3. Policy Attestation ▴ The committee reviews a sample of LIS trade files to ensure that the documented rationale is sound and that the execution policy is being followed consistently. Any deviations must be explained and documented.
4. Actionable Insights ▴ The review process must conclude with concrete actions. This could involve changing the broker list, adjusting algorithmic parameters, or providing further training to the trading desk. The minutes of these meetings and the resulting actions are a crucial part of the firm’s evidentiary record.

This systematic process of data capture, analysis, and governance creates a closed-loop system. It ensures not only that the firm can prove it achieved best execution on a past trade but also that it is continuously refining its processes to achieve better execution in the future. This is the ultimate fulfillment of the principles-based obligation.

Reflection

From Mandate to Mechanism

The transition away from a prescriptive reporting standard marks a significant maturation point for the industry. It moves the measure of diligence from a public, standardized output to an internal, proprietary system of control. The question for each firm is no longer “Have we filed the correct report?” but rather “Have we built a sufficiently robust mechanism to validate our own execution quality?” This requires a deep investment in data infrastructure, analytical capability, and governance.

The output is a framework that provides not just regulatory defense, but true operational intelligence. It transforms a fiduciary duty from a burden to be managed into a process that can be optimized, yielding a durable competitive advantage in execution performance.