# How Do Firms Evidence Best Execution for over the Counter Products? ▴ Question

**Published:** 2025-08-10
**Categories:** Question

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## Concept

The obligation to secure [best execution](https://prime.greeks.live/area/best-execution/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) for over-the-counter (OTC) products introduces a level of complexity far removed from the centralized transparency of exchange-traded instruments. For instruments like bespoke interest rate swaps, structured notes, or large blocks of corporate bonds, there is no single, visible order book. Instead, liquidity is fragmented across a network of dealers.

Evidencing best execution in this environment is a function of demonstrating a rigorous, systematic process designed to secure the most favorable terms for a client under the prevailing market conditions. This is an exercise in diligence, documentation, and data-driven validation.

The core principle is not about achieving a theoretically perfect price on every single trade, an impossible standard in a decentralized market. Rather, it is about the consistent application of a robust framework that considers a spectrum of execution factors. Regulatory bodies like the [Financial Industry Regulatory Authority](https://prime.greeks.live/question/what-is-the-role-of-the-financial-industry-regulatory-authority-finra-in-block-trading/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) (FINRA) and European Securities and Markets Authority (ESMA) mandate that firms take “reasonable diligence” or “all sufficient steps” to achieve this outcome.

This shifts the focus from the result of a single transaction to the quality and integrity of the overall execution process. The evidence, therefore, is the documented output of this process.

> Firms must systematically prove that their execution process, from counterparty selection to post-trade analysis, is designed to consistently deliver the best possible outcome for the client.

![A modular system with beige and mint green components connected by a central blue cross-shaped element, illustrating an institutional-grade RFQ execution engine. This sophisticated architecture facilitates high-fidelity execution, enabling efficient price discovery for multi-leg spreads and optimizing capital efficiency within a Prime RFQ framework for digital asset derivatives](https://options.greeks.live/wp-content/uploads/2025/07/principal-prime-os-rfq-engine-for-digital-asset-derivatives.jpg)

## The Anatomy of OTC Execution Factors

While price is the dominant factor, it exists within a constellation of other critical variables that must be weighed to determine the optimal execution strategy. The relative importance of these factors is dynamic, shifting with the specific characteristics of the client, the order, the instrument, and the current state of the market. A firm’s ability to articulate its weighting of these factors for a given trade is a foundational piece of evidence.

- **Price** ▴ The ultimate price at which the transaction is executed. In the OTC space, this is often evaluated against a reference or benchmark price derived from market data or internal models. 

- **Costs** ▴ All explicit and implicit costs associated with the trade. This includes not only direct fees but also the implicit cost embedded in the bid-ask spread offered by a counterparty.

- **Speed of Execution** ▴ The velocity at which a trade can be completed. For certain strategies or in volatile markets, speed can be prioritized to minimize the risk of adverse market movement (slippage).

- **Likelihood of Execution and Settlement** ▴ The certainty that a trade of a particular size and complexity can be completed and will settle without issue. This is paramount for large or illiquid instruments where capacity is a concern.

- **Size and Nature of the Order** ▴ A large block trade in an illiquid bond requires a different handling strategy than a standard-size FX forward. The nature of the order dictates the appropriate execution methodology and the pool of potential counterparties.

- **Counterparty Creditworthiness** ▴ For bilateral [OTC derivatives](https://prime.greeks.live/area/otc-derivatives/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) that are not centrally cleared, the financial stability of the counterparty is a significant risk factor that must be considered as part of the overall value proposition. 

The challenge lies in demonstrating that the chosen execution strategy represented the correct balance of these factors at the moment of execution. This requires a systematic approach to data capture and a clear, auditable trail of the decision-making process.

![Central teal-lit mechanism with radiating pathways embodies a Prime RFQ for institutional digital asset derivatives. It signifies RFQ protocol processing, liquidity aggregation, and high-fidelity execution for multi-leg spread trades, enabling atomic settlement within market microstructure via quantitative analysis](https://options.greeks.live/wp-content/uploads/2025/07/prime-os-core-for-institutional-digital-asset-rfq-protocol-execution-engine.jpg)

![A symmetrical, multi-faceted geometric structure, a Prime RFQ core for institutional digital asset derivatives. Its precise design embodies high-fidelity execution via RFQ protocols, enabling price discovery, liquidity aggregation, and atomic settlement within market microstructure](https://options.greeks.live/wp-content/uploads/2025/07/prime-os-institutional-digital-asset-options-rfq-engine.jpg)

## Strategy

A defensible strategy for evidencing best execution is built upon a formal, comprehensive policy that serves as the operational blueprint for all trading activities. This is not a static document but a dynamic framework that is regularly reviewed and refined. The policy must clearly articulate the firm’s approach to satisfying its regulatory obligations and be specific enough to guide traders in their day-to-day decisions. It forms the primary evidence that the firm has a systematic and thoughtful process in place.

The strategy begins with the careful selection and ongoing monitoring of execution venues and counterparties. For [OTC products](https://prime.greeks.live/area/otc-products/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite), this means establishing a roster of approved dealers and liquidity providers. This selection process is itself a component of best execution, involving an assessment of their financial stability, market expertise, and historical execution quality. A firm must be able to justify why a particular set of counterparties was chosen and demonstrate that their performance is subject to regular, data-driven review.

![Institutional-grade infrastructure supports a translucent circular interface, displaying real-time market microstructure for digital asset derivatives price discovery. Geometric forms symbolize precise RFQ protocol execution, enabling high-fidelity multi-leg spread trading, optimizing capital efficiency and mitigating systemic risk](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-request-for-quote-protocol-high-fidelity-execution-market-microstructure-intelligence-layer.jpg)

## The Best Execution Policy Framework

A robust policy provides the structure within which all execution decisions are made and evaluated. It is the reference point for traders, compliance officers, and regulators, detailing the procedures for achieving and evidencing best execution across different asset classes. The table below outlines the essential components of such a policy.

### Table 1 ▴ Core Components of a Best Execution Policy

| Component | Strategic Function |
| --- | --- |
| Scope and Application | Defines which clients, financial instruments (e.g. bonds, swaps, options), and order types are covered by the policy. |
| Execution Factors | Lists the range of factors (price, costs, speed, etc.) the firm considers and describes the methodology for determining their relative importance based on order characteristics. |
| Counterparty & Venue Selection | Details the due diligence process for approving counterparties and execution venues. It includes criteria for initial selection and ongoing performance monitoring. |
| Execution Methodologies | Specifies the approved trading methods, such as Request for Quote (RFQ), voice broking, or use of electronic platforms, and the circumstances under which each is appropriate. |
| Monitoring and Review | Outlines the process for post-trade analysis (TCA), the frequency of reviews (e.g. quarterly), and the governance structure (e.g. Best Execution Committee) responsible for oversight. |
| Record-Keeping | Establishes the requirements for documenting all stages of the trade lifecycle to create a complete audit trail. |

![Precision metallic bars intersect above a dark circuit board, symbolizing RFQ protocols driving high-fidelity execution within market microstructure. This represents atomic settlement for institutional digital asset derivatives, enabling price discovery and capital efficiency](https://options.greeks.live/wp-content/uploads/2025/08/institutional-digital-asset-derivatives-rfq-protocol-execution-precision-systemic-framework.jpg)

## Choosing the Execution Methodology

A key strategic decision is the choice of execution method. For many OTC products, the [Request for Quote](https://prime.greeks.live/area/request-for-quote/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) (RFQ) process is a cornerstone of demonstrating best execution. By soliciting bids or offers from multiple competing dealers, a firm creates a contemporaneous record of the available market price at a specific point in time.

This competitive process is a powerful piece of evidence. However, the choice of method depends on the instrument and market conditions.

> The strategy is to create an auditable system where the rationale for every execution decision is clear and consistent with a predefined policy.

For very large or illiquid trades, a voice-brokered transaction might be more appropriate to avoid information leakage that could result from a broad electronic RFQ. The policy must provide guidance on these choices, ensuring that the selected method is always aligned with the client’s best interests. The ability to evidence why a particular method was chosen is as important as the outcome itself.

![Precision instruments, resembling calibration tools, intersect over a central geared mechanism. This metaphor illustrates the intricate market microstructure and price discovery for institutional digital asset derivatives](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-rfq-execution-engine-microstructure-analytics.jpg)

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## Execution

The execution phase is where policy is translated into practice and where the definitive evidence of best execution is generated. This is a continuous process of data capture and analysis that spans the entire lifecycle of a trade ▴ pre-trade, at-trade, and post-trade. Each stage produces a critical layer of evidence that, when combined, forms a comprehensive and defensible record of the firm’s diligence.

![Angular metallic structures intersect over a curved teal surface, symbolizing market microstructure for institutional digital asset derivatives. This depicts high-fidelity execution via RFQ protocols, enabling private quotation, atomic settlement, and capital efficiency within a prime brokerage framework](https://options.greeks.live/wp-content/uploads/2025/07/precision-execution-for-institutional-digital-asset-derivatives-via-rfq-protocol-microstructure-optimization.jpg)

## Pre-Trade Evidence Generation

Before an order is placed, a firm must document its assessment of the prevailing market conditions and its intended execution strategy. This ex-ante analysis demonstrates that the firm approached the trade with a clear plan rooted in the principles of its [best execution policy](https://prime.greeks.live/area/best-execution-policy/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). This involves capturing a snapshot of relevant market data to establish a fair value or benchmark price against which the eventual execution can be judged.

For a complex derivative, this could involve documenting the inputs to an internal pricing model, such as volatility surfaces and yield curves. For a corporate bond, it might involve recording yields of comparable securities.

- **Market Condition Snapshot** ▴ Documenting key market data points (e.g. benchmark rates, credit spreads, volatility levels) at the time the trading decision is made.

- **Strategy Formulation** ▴ Recording the rationale for the chosen execution method (e.g. RFQ to three dealers, voice negotiation) based on the order’s size, liquidity profile, and urgency.

- **Counterparty Selection** ▴ Justifying the choice of counterparties for the RFQ process, linking back to the firm’s approved list and any relevant performance data.

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## At-Trade Documentation the RFQ Process

The at-trade phase is the most direct source of evidence. In an RFQ-based execution, every step must be meticulously logged. This creates a clear audit trail of the competitive process.

Timestamps are critical, as they place the execution in the precise context of a moving market. The goal is to create a complete record that allows a third party to reconstruct the transaction and verify that the best available quote was taken.

Key data points to capture include the exact time the RFQ was sent, the identity of all counterparties who received it, the full details of all quotes received (price, size), the time each quote was received, and the timestamp of the final execution. All associated communications, such as chat messages or recorded phone calls, are also part of this evidentiary record.

> Post-trade analysis transforms raw execution data into actionable intelligence, providing the ultimate proof of a firm’s commitment to its best execution obligations.

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## Post-Trade Validation Transaction Cost Analysis (TCA)

Post-trade analysis is the final and most quantitative layer of evidence. [Transaction Cost Analysis](https://prime.greeks.live/area/transaction-cost-analysis/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) for OTC products is more complex than for equities but is essential for validating execution quality over time. It involves comparing the executed price against one or more benchmarks to calculate metrics like slippage or [implementation shortfall](https://prime.greeks.live/area/implementation-shortfall/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). The choice of benchmark is critical; it could be the mid-price derived from a composite data feed, the price at the time the order was received by the trader (arrival price), or the best quote received from a non-winning dealer in an RFQ.

The following table provides a simplified example of a TCA report for a series of Interest Rate Swap executions. It demonstrates how different metrics can be used to evaluate performance and identify potential issues.

### Table 2 ▴ Sample Transaction Cost Analysis Report for OTC Interest Rate Swaps

| Trade ID | Notional | Executed Rate | Benchmark Mid-Rate | Spread to Mid (bps) | # of Quotes | Winning Quote vs. Next Best (bps) |
| --- | --- | --- | --- | --- | --- | --- |
| SWP-001 | $100M | 3.2550% | 3.2520% | 0.30 | 3 | 0.15 |
| SWP-002 | $50M | 3.2810% | 3.2795% | 0.15 | 4 | 0.10 |
| SWP-003 | $250M | 3.2490% | 3.2450% | 0.40 | 2 | 0.20 |
| SWP-004 | $100M | 3.2620% | 3.2600% | 0.20 | 3 | 0.05 |

This quantitative analysis, combined with a qualitative review by a firm’s Best Execution Committee, provides the comprehensive evidence required. It demonstrates not only that the firm followed its policies for a given trade but also that it actively monitors outcomes to refine its strategies and ensure it is consistently delivering the best possible results for its clients over the long term.

![A dynamic central nexus of concentric rings visualizes Prime RFQ aggregation for digital asset derivatives. Four intersecting light beams delineate distinct liquidity pools and execution venues, emphasizing high-fidelity execution and precise price discovery](https://options.greeks.live/wp-content/uploads/2025/07/prime-os-rfq-hub-for-digital-asset-derivatives-execution.jpg)

## References

- Financial Industry Regulatory Authority. (2021). _FINRA Rule 5310 ▴ Best Execution and Interpositioning_. FINRA.

- European Securities and Markets Authority. (2017). _Markets in Financial Instruments Directive II (MiFID II)_. EU Regulation 2014/65/EU.

- Burnham, J. (2018). _How To Calculate Implicit Transaction Costs For OTC Derivatives_. OpenGamma.

- IBM Global Business Services. (2006). _Options for providing Best Execution in dealer markets_. Risk.net.

- S&P Global. (2021). _Portfolio Valuations ▴ Best Execution ▴ OTC Derivatives_. S&P Global Market Intelligence.

- Janus Henderson Investors. (2023). _Best Execution Policy_.

- BlackRock. (2023). _Global Execution and Order Placement Disclosure_.

- Morgan Stanley. (2022). _Best Execution & OTC Order Handling Policy_.

- CFA Institute. (2019). _Transaction Cost Analysis ▴ A Guide to Best Practices_.

- Petrescu, M. & Shkilko, A. (2013). _Measuring Transaction Costs in OTC markets_. U.S. Securities and Exchange Commission.

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## Reflection

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## From Obligation to Operational Alpha

The framework for evidencing best execution in over-the-counter markets represents a significant operational undertaking. It requires a deep investment in technology, data, and governance. The systems built to satisfy this regulatory requirement ▴ the data capture mechanisms, the analytical engines for TCA, the formalized policy frameworks ▴ yield a powerful byproduct. They create a high-fidelity data asset that details every aspect of a firm’s trading activity.

The true strategic endpoint is the transformation of this compliance function into a source of competitive advantage. The same data used to evidence best execution to a regulator can be used to refine trading strategies, optimize counterparty selection, and minimize implicit costs with a precision that was previously unattainable. The process of proving diligence becomes a system for achieving superior performance. The operational architecture built to meet an obligation becomes the engine for generating alpha.

![Intersecting translucent aqua blades, etched with algorithmic logic, symbolize multi-leg spread strategies and high-fidelity execution. Positioned over a reflective disk representing a deep liquidity pool, this illustrates advanced RFQ protocols driving precise price discovery within institutional digital asset derivatives market microstructure](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocols-optimized-algorithmic-execution-microstructure-for-price-discovery.jpg)

## Glossary

<a href="https://prime.greeks.live/area/best-execution/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A precise lens-like module, symbolizing high-fidelity execution and market microstructure insight, rests on a sharp blade, representing optimal smart order routing. Curved surfaces depict distinct liquidity pools within an institutional-grade Prime RFQ, enabling efficient RFQ for digital asset derivatives](https://options.greeks.live/wp-content/uploads/2025/07/high-fidelity-digital-asset-derivatives-execution-via-rfq-protocols.jpg)

## Best Execution

Meaning ▴ Best Execution is the obligation to obtain the most favorable terms reasonably available for a client's order. </a><a href="https://prime.greeks.live/question/what-is-the-role-of-the-financial-industry-regulatory-authority-finra-in-block-trading/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![An institutional grade system component, featuring a reflective intelligence layer lens, symbolizes high-fidelity execution and market microstructure insight. This enables price discovery for digital asset derivatives](https://options.greeks.live/wp-content/uploads/2025/08/institutional-digital-asset-derivatives-precision-rfq-execution-system-interface.jpg)

## Financial Industry Regulatory Authority

FINRA's role in block trading is to architect market integrity by enforcing rules against the misuse of non-public information. </a><a href="https://prime.greeks.live/area/otc-derivatives/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A precise system balances components: an Intelligence Layer sphere on a Multi-Leg Spread bar, pivoted by a Private Quotation sphere atop a Prime RFQ dome. A Digital Asset Derivative sphere floats, embodying Implied Volatility and Dark Liquidity within Market Microstructure](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocols-high-fidelity-execution-7.jpg)

## Otc Derivatives

Meaning ▴ OTC Derivatives are bilateral financial contracts executed directly between two counterparties, outside the regulated environment of a centralized exchange. </a><a href="https://prime.greeks.live/area/otc-products/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A complex, multi-faceted crystalline object rests on a dark, reflective base against a black background. This abstract visual represents the intricate market microstructure of institutional digital asset derivatives](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-prime-os-execution-architecture.jpg)

## Otc Products

Meaning ▴ OTC Products designate financial instruments executed via bilateral negotiation, independent of a centralized exchange or clearing house infrastructure. </a><a href="https://prime.greeks.live/area/request-for-quote/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A multi-layered device with translucent aqua dome and blue ring, on black. This represents an Institutional-Grade Prime RFQ Intelligence Layer for Digital Asset Derivatives](https://options.greeks.live/wp-content/uploads/2025/08/institutional-digital-asset-derivatives-rfq-protocol-intelligence-layer.jpg)

## Request for Quote

Meaning ▴ A Request for Quote, or RFQ, constitutes a formal communication initiated by a potential buyer or seller to solicit price quotations for a specified financial instrument or block of instruments from one or more liquidity providers. </a><a href="https://prime.greeks.live/area/best-execution-policy/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Abstract image showing interlocking metallic and translucent blue components, suggestive of a sophisticated RFQ engine. This depicts the precision of an institutional-grade Crypto Derivatives OS, facilitating high-fidelity execution and optimal price discovery within complex market microstructure for multi-leg spreads and atomic settlement](https://options.greeks.live/wp-content/uploads/2025/07/precision-engineered-market-microstructure-for-institutional-digital-asset-derivatives-rfq.jpg)

## Best Execution Policy

Meaning ▴ The Best Execution Policy defines the obligation for a broker-dealer or trading firm to execute client orders on terms most favorable to the client. </a><a href="https://prime.greeks.live/area/transaction-cost-analysis/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A sophisticated dark-hued institutional-grade digital asset derivatives platform interface, featuring a glowing aperture symbolizing active RFQ price discovery and high-fidelity execution. The integrated intelligence layer facilitates atomic settlement and multi-leg spread processing, optimizing market microstructure for prime brokerage operations and capital efficiency](https://options.greeks.live/wp-content/uploads/2025/07/institutional-crypto-derivatives-rfq-engine-intelligence-layer.jpg)

## Transaction Cost Analysis

Meaning ▴ Transaction Cost Analysis (TCA) is the quantitative methodology for assessing the explicit and implicit costs incurred during the execution of financial trades. </a><a href="https://prime.greeks.live/area/implementation-shortfall/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Abstract spheres depict segmented liquidity pools within a unified Prime RFQ for digital asset derivatives. Intersecting blades symbolize precise RFQ protocol negotiation, price discovery, and high-fidelity execution of multi-leg spread strategies, reflecting market microstructure](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-execution-1.jpg)

## Implementation Shortfall

Meaning ▴ Implementation Shortfall quantifies the total cost incurred from the moment a trading decision is made to the final execution of the order. </a>

**Tags:** [Transaction Cost](https://options.greeks.live/area/transaction-cost/), [OTC Products](https://options.greeks.live/area/otc-products/), [FINRA Rule 5310](https://options.greeks.live/area/finra-rule-5310/), [Price Slippage](https://options.greeks.live/area/price-slippage/), [Best Execution Policy](https://options.greeks.live/area/best-execution-policy/), [OTC Derivatives](https://options.greeks.live/area/otc-derivatives/)	

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- 
### [Can a Firm Justify a Higher Hedging Cost to Comply with MiFID II’s Best Execution Rules?](https://options.greeks.live/question/can-a-firm-justify-a-higher-hedging-cost-to-comply-with-mifid-iis-best-execution-rules/)
![A deconstructed mechanical system with segmented components, revealing intricate gears and polished shafts, symbolizing the transparent, modular architecture of an institutional digital asset derivatives trading platform. This illustrates multi-leg spread execution, RFQ protocols, and atomic settlement processes.](https://options.greeks.live/wp-content/uploads/2025/07/deconstructed-principal-trading-system-revealing-core-mechanics-of-digital-asset-derivatives-execution.jpg)

A firm can justify higher hedging costs by demonstrating through a robust, data-driven framework that such costs are instrumental to achieving a superior net outcome for the client across all relevant MiFID II execution factors.

- 
### [How Does Market Transparency Affect Best Execution Strategies in Different Asset Classes?](https://options.greeks.live/question/how-does-market-transparency-affect-best-execution-strategies-in-different-asset-classes/)
![A transparent glass bar, representing high-fidelity execution and precise RFQ protocols, extends over a white sphere symbolizing a deep liquidity pool for institutional digital asset derivatives. A small glass bead signifies atomic settlement within the granular market microstructure, supported by robust Prime RFQ infrastructure ensuring optimal price discovery and minimal slippage.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-grade-digital-asset-derivatives-rfq-execution-prime-os-intelligence-layer-facilitating-optimal-price-discovery-and-best-execution.jpg)

Market transparency dictates the execution framework, shifting the strategic focus from price discovery in opaque markets to impact management in transparent ones.

- 
### [What Are the Key Responsibilities of a Best Execution Committee in Practice?](https://options.greeks.live/question/what-are-the-key-responsibilities-of-a-best-execution-committee-in-practice/)
![A sleek, multi-component device with a dark blue base and beige bands culminates in a sophisticated top mechanism. This precision instrument symbolizes a Crypto Derivatives OS facilitating RFQ protocol for block trade execution, ensuring high-fidelity execution and atomic settlement for institutional-grade digital asset derivatives across diverse liquidity pools.](https://options.greeks.live/wp-content/uploads/2025/08/advanced-mechanism-for-principal-trading-firm-rfq-protocols-and-high-fidelity-digital-asset-derivatives-execution.jpg)

The Best Execution Committee operationalizes a firm's fiduciary duty, systematically translating policy into quantifiable execution quality.

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---

**Original URL:** https://options.greeks.live/question/how-do-firms-evidence-best-execution-for-over-the-counter-products/
