How Can Firms Effectively Demonstrate Best Execution without RTS 28 Reports?

Concept

The Enduring Mandate beyond the Report

The suspension and anticipated removal of the RTS 28 reporting requirement does not dissolve the fundamental obligation of best execution under MiFID II. This development shifts the focus from a prescriptive, report-driven demonstration to a more principles-based, evidence-led approach. It compels investment firms to construct and maintain a robust internal system of execution quality analysis. The core responsibility remains ▴ firms must take all sufficient steps to obtain the best possible result for their clients on a consistent basis.

The absence of a standardized report elevates the importance of a firm’s own data architecture and governance framework as the primary means of proving compliance and delivering value. The conversation moves from box-ticking to a dynamic and continuous process of self-assessment and improvement.

At its heart, this evolution recognizes that static, annual reports were often a lagging indicator of execution quality, burdensome to produce, and of limited practical use to end investors. The new paradigm demands a proactive and integrated approach. Firms must now architect a comprehensive internal system that not only monitors execution quality but also allows for its clear and coherent demonstration to both regulators and clients upon request.

This system becomes the living proof of the firm’s commitment to its fiduciary duties. It is a transition from a compliance exercise to an operational discipline, where the ability to analyze, justify, and document execution choices is paramount.

The core best execution duty persists, demanding a shift from standardized reporting to a dynamic, evidence-based internal framework.

Defining the Execution Quality Factors

The criteria for assessing best execution extend far beyond the singular dimension of price. MiFID II outlines a multi-faceted obligation where firms must consider a range of execution factors. While total consideration, combining the price of the financial instrument and all associated costs, is the dominant factor for retail clients, the framework for professional clients is more complex. The weight given to each factor can be adjusted based on the client’s objectives, the nature of the order, and the characteristics of the financial instrument.

A firm’s execution policy must clearly articulate how these factors are weighed and prioritized. This involves a qualitative and quantitative assessment of:

• Price ▴ The price at which the transaction is executed.
• Costs ▴ All expenses incurred by the client which are directly related to the execution of the order, including execution venue fees, clearing and settlement fees, and any other fees paid to third parties involved in the execution of the order.
• Speed of Execution ▴ The elapsed time between the order’s receipt and its final execution.
• Likelihood of Execution and Settlement ▴ The probability that the order will be successfully executed and settled, a critical factor in illiquid or volatile markets.
• Size and Nature of the Order ▴ The specific characteristics of the order, which may influence the choice of execution venue or method to minimize market impact.
• Any other consideration relevant to the execution of the order ▴ A catch-all category that allows firms to incorporate other pertinent factors, such as the quality of a venue’s clearing and settlement services or its level of transparency.

Demonstrating best execution effectively means systematically capturing data on these factors for every relevant trade and being able to articulate the logic behind the chosen execution strategy. This requires a sophisticated data infrastructure and a clear, documented decision-making process.

Strategy

Constructing the Internal Governance System

Without the rigid structure of RTS 28, the onus is on the firm to design and implement a comprehensive internal governance system for best execution. This system is not a single piece of software but a combination of policies, procedures, committees, and data analysis frameworks that work in concert. The objective is to create a closed-loop system ▴ one that defines policy, monitors performance against that policy, identifies deviations, and implements corrective actions.

The foundational document is the Order Execution Policy (OEP). This is the firm’s public declaration of how it will deliver best execution. It must be clear, detailed, and written in a way that is easily understood by clients.

The OEP should detail the execution factors the firm considers, their relative importance, and the specific execution venues and strategies it employs for different classes of financial instruments. It is the constitution upon which the entire governance system is built.

An effective strategy replaces static reports with a dynamic governance loop of policy, monitoring, analysis, and documented improvement.

The Role of the Best Execution Committee

A dedicated Best Execution Committee, or an equivalent governance body, is a critical component of this strategy. This committee should be composed of senior staff from relevant departments, including trading, compliance, risk, and technology. Its mandate is to oversee the entire best execution process. Key responsibilities include:

• Policy Review ▴ At least annually, or whenever a material change occurs, the committee must review and approve the OEP to ensure it remains fit for purpose.
• Venue Analysis ▴ The committee must regularly assess the execution quality of the venues listed in the OEP, using both qualitative and quantitative data. This includes a formal process for adding or removing venues.
• Performance Monitoring ▴ The committee reviews the firm’s execution performance, typically through detailed Transaction Cost Analysis (TCA) reports, to ensure that the outcomes are consistent with the OEP.
• Incident Investigation ▴ Any significant execution failures or client complaints must be investigated by the committee to identify root causes and implement remedial actions.
• Documentation ▴ The committee is responsible for ensuring that all aspects of the best execution process, from policy reviews to performance monitoring, are thoroughly documented. These records are the primary evidence used to demonstrate compliance to regulators.

The Duality of Analysis Quantitative and Qualitative

Demonstrating best execution requires a balanced approach that combines rigorous quantitative analysis with insightful qualitative judgment. Relying on one without the other provides an incomplete picture. The firm’s strategy must integrate both streams of analysis into its regular monitoring and review processes.

Quantitative Analysis through TCA

Transaction Cost Analysis (TCA) is the cornerstone of quantitative monitoring. It moves beyond simple price comparison to provide a nuanced view of execution performance against various benchmarks. A robust TCA framework is essential for proving that execution outcomes are consistently strong. The table below outlines key TCA metrics and their strategic importance.

Qualitative Factors in Venue and Counterparty Selection

Quantitative data alone cannot justify execution choices. A firm must also conduct and document a thorough qualitative assessment of its execution venues and counterparties. This assessment should be a formal part of the due diligence process and reviewed regularly by the Best Execution Committee. Key qualitative factors include:

• Financial Stability ▴ Assessing the creditworthiness and operational resilience of counterparties and execution venues to minimize settlement risk.
• Clearing and Settlement Arrangements ▴ Evaluating the efficiency, reliability, and cost of post-trade processes, as failures here can negate good execution.
• Technology and Connectivity ▴ Assessing the latency, reliability, and functionality of a venue’s technology stack, including its API capabilities and order type support.
• Regulatory Standing ▴ Ensuring that all execution venues and counterparties are appropriately regulated and in good standing with the relevant authorities.
• Liquidity Profile ▴ Understanding the nature of the liquidity on a venue. Is it dominated by a few large market makers? Is it prone to disappearing in times of stress? This goes beyond simple volume metrics.

Execution

The Operational Playbook for Demonstrating Compliance

Moving from strategy to execution requires a detailed operational playbook. This playbook translates the principles of the OEP and the findings of the governance committee into a repeatable and auditable process. The core of this process is the ability to produce a comprehensive “Best Execution Dossier” on demand for any given period. This dossier serves as the definitive evidence package for regulators and clients, replacing the function of the RTS 28 report.

The creation of this dossier is not a one-off event but the output of a continuous data collection and analysis cycle. The following steps form the basis of this operational playbook:

1. Data Capture ▴ Implement systems to capture all relevant order and execution data. This must go beyond the basic trade record to include timestamps for order receipt, routing, and execution, as well as market data snapshots (e.g. BBO) at the time of execution.
2. Regular Monitoring ▴ On at least a quarterly basis, the compliance or trading function must produce a detailed TCA report covering all asset classes and execution venues. This report should be presented to the Best Execution Committee.
3. Qualitative Review ▴ The committee must formally review the qualitative aspects of each execution venue and counterparty on an annual basis, documenting their findings and any decisions made.
4. Policy Linkage ▴ The analysis must explicitly link back to the OEP. The monitoring reports should assess whether the firm is adhering to its stated policies and whether those policies are effective in achieving best execution.
5. Documentation and Record-Keeping ▴ Every part of the process ▴ from the data capture methodology to the minutes of the committee meetings ▴ must be meticulously documented and stored for a minimum of five years. This creates an unassailable audit trail.

A Framework for the Best Execution Dossier

The Best Execution Dossier is the tangible output of the firm’s governance system. It should be a self-contained package that tells a clear and compelling story about the firm’s commitment to execution quality. A well-structured dossier will contain both a narrative summary and detailed quantitative evidence.

The Best Execution Dossier becomes the definitive, on-demand evidence package, combining narrative justification with granular quantitative proof.

The table below provides a template for a summary report that could form the executive summary of the dossier. This table synthesizes data from various sources to provide a holistic view of execution performance across different venues for a specific asset class.

The Narrative Component

Accompanying the quantitative data must be a clear narrative. This narrative, authored or approved by the Best Execution Committee, should explain the firm’s performance and justify its execution choices. It should address key questions such as:

• How does the firm’s execution performance compare to the previous period?
• Were there any significant changes in market conditions that impacted the execution strategy?
• Why was a particular mix of venues used? For example, explaining that dark pools were used to mitigate the market impact of large orders.
• How does the firm ensure fair pricing for OTC trades? This would involve detailing the process of gathering market data and comparing it to similar products.
• What actions have been taken as a result of the monitoring? For example, a decision to reduce flow to a venue showing signs of high reversion.

This combination of a clear, evidence-based narrative and detailed, well-presented quantitative data provides a far more compelling demonstration of best execution than a standardized report ever could. It shows a firm that is not just compliant, but is actively engaged in managing and optimizing its execution quality for the benefit of its clients.

Reflection

From Obligation to Operational Intelligence

The shift away from prescriptive reporting represents a maturation of the regulatory landscape. It challenges firms to move beyond a compliance mindset and embed the principles of best execution into the very fabric of their trading operations. The framework required to demonstrate best execution without RTS 28 ▴ robust governance, sophisticated data analysis, and a clear articulation of strategy ▴ is the same framework required for superior trading performance. The process of proving best execution becomes indistinguishable from the process of achieving it.

This presents an opportunity. The systems built to satisfy regulatory scrutiny can be leveraged to generate profound operational intelligence. A well-designed TCA system does more than just check a box; it provides critical feedback on algorithm performance, venue toxicity, and counterparty behavior. The qualitative assessments of venues strengthen risk management.

The entire governance process fosters a culture of accountability and continuous improvement. By embracing this challenge, firms can transform a regulatory obligation into a source of durable competitive advantage, where the pursuit of compliance and the pursuit of alpha become two sides of the same coin.