How Do Firms Evidence Best Execution without RTS 27 Reports? ▴ Question

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Concept

The decommissioning of RTS 27 reports has created a vacuum in the formal architecture of best execution oversight. This development does not, however, signal a retreat from the fundamental obligation. Instead, it marks a shift from a prescriptive, standardized reporting model to a more principles-based, firm-specific demonstration of execution quality.

The core challenge for financial institutions is to construct a robust, evidence-based framework that proves they are consistently acting in their clients’ best interests, even without the familiar template of RTS 27. This requires a deeper, more intrinsic integration of best execution principles into the very fabric of a firm’s trading and compliance operations.

At its heart, best execution is a holistic concept that extends far beyond simply achieving the best price on a given trade. It encompasses a range of factors, including costs, speed, likelihood of execution and settlement, size, and any other consideration relevant to the execution of an order. The removal of RTS 27 reporting requirements compels firms to move beyond a check-the-box mentality and to cultivate a more dynamic, data-driven approach to monitoring and evidencing their execution performance. This necessitates a sophisticated understanding of market microstructure, a commitment to rigorous data analysis, and the implementation of a comprehensive governance framework.

The cessation of RTS 27 reporting mandates a transition from standardized compliance to a firm-specific, principles-based demonstration of best execution, demanding a more integrated and data-driven operational framework.

The new paradigm for evidencing best execution rests on three pillars ▴ a clearly defined and consistently applied execution policy, a robust system for monitoring execution quality, and a comprehensive governance and oversight process. The execution policy serves as the foundation, outlining the firm’s approach to achieving best execution across different financial instruments and client types. The monitoring system provides the empirical evidence to support the policy, leveraging a range of quantitative and qualitative metrics to assess performance. Finally, the governance process ensures that the entire framework is subject to regular review, challenge, and enhancement.

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Strategy

In the absence of RTS 27 reports, a firm’s strategy for evidencing best execution must be both comprehensive and adaptable. It should be designed to withstand regulatory scrutiny while also providing valuable insights that can be used to improve execution outcomes. A key element of this strategy is the development of a sophisticated Transaction Cost Analysis (TCA) framework.

TCA provides a quantitative basis for assessing execution performance, allowing firms to measure their results against a variety of benchmarks and to identify areas for improvement. A well-designed TCA program will incorporate a range of metrics, including implementation shortfall, volume-weighted average price (VWAP), and time-weighted average price (TWAP), tailored to the specific characteristics of the asset class and trading strategy.

Beyond quantitative analysis, a robust best execution strategy must also incorporate a qualitative assessment of execution quality. This involves a more nuanced evaluation of the factors that can impact execution outcomes, such as the choice of execution venue, the use of different order types, and the prevailing market conditions. This qualitative analysis should be documented and integrated into the firm’s overall assessment of its execution performance. For example, a firm might conduct regular reviews of its execution venue selection process to ensure that it is considering a wide range of factors, including liquidity, price, and the likelihood of execution.

A resilient best execution strategy integrates sophisticated Transaction Cost Analysis with qualitative assessments of execution factors, ensuring a holistic and defensible approach to demonstrating performance.

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What Are the Core Components of a Post-RTS 27 Execution Policy?

A post-RTS 27 execution policy should be a dynamic document that is regularly reviewed and updated to reflect changes in the market and the firm’s business. It should clearly articulate the firm’s approach to achieving best execution and should be tailored to the specific needs of its clients. The following are some of the core components that should be included in a post-RTS 27 execution policy:

Execution Factors ▴ A detailed description of the relative importance the firm assigns to the various execution factors, such as price, costs, speed, and likelihood of execution.
Execution Venues ▴ A comprehensive list of the execution venues the firm uses and an explanation of the criteria used to select them.
Order Handling ▴ A clear explanation of how the firm handles client orders, including the use of different order types and the process for managing conflicts of interest.
Monitoring and Review ▴ A description of the firm’s process for monitoring the effectiveness of its execution arrangements and for identifying and remedying any deficiencies.

The table below provides a sample framework for a post-RTS 27 best execution policy, outlining the key components and providing examples of the information that should be included.

Sample Best Execution Policy Framework
Component	Description
Execution Factors	A detailed breakdown of the execution factors and their relative importance for different asset classes and client types.
Execution Venues	A list of approved execution venues, along with a due diligence process for adding new venues.
Order Handling	A description of the firm’s order routing logic and its process for handling specific client instructions.
Monitoring and Review	A schedule for regular reviews of the execution policy and a process for escalating and resolving any issues.

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Execution

The execution of a best execution framework in a post-RTS 27 world requires a significant investment in technology, data, and human expertise. Firms must be able to capture, store, and analyze large volumes of trading data in order to effectively monitor their execution performance. This requires a robust data infrastructure, including a centralized data warehouse and a suite of analytical tools. Firms must also have a team of skilled professionals who are able to interpret the data and to identify meaningful insights.

A key component of the execution framework is the development of a comprehensive suite of best execution reports. These reports should be designed to provide a clear and concise overview of the firm’s execution performance and should be tailored to the needs of different stakeholders, including senior management, compliance, and regulators. The reports should include a mix of quantitative and qualitative information and should be produced on a regular basis.

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How Can Firms Leverage Technology to Enhance Best Execution Monitoring?

Technology plays a critical role in the execution of a best execution framework. The following are some of the ways that firms can leverage technology to enhance their best execution monitoring capabilities:

Automated Data Capture ▴ Firms can use technology to automate the capture of trading data from a variety of sources, including their order management system (OMS), execution management system (EMS), and third-party data providers.
Advanced Analytics ▴ Firms can use advanced analytics tools to identify patterns and trends in their trading data that may not be apparent from a simple review of the data.
Real-Time Monitoring ▴ Firms can use real-time monitoring tools to track their execution performance throughout the trading day and to identify any potential issues as they arise.

The table below provides an overview of the key technologies that can be used to support a best execution framework.

Best Execution Technology Stack
Technology	Function
Order Management System (OMS)	Captures and manages client orders.
Execution Management System (EMS)	Provides access to a wide range of execution venues and trading algorithms.
Transaction Cost Analysis (TCA)	Analyzes the costs associated with trading and provides insights into execution performance.
Data Warehouse	Stores and manages large volumes of trading data.

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References

ICMA. (2021). Response form for the Consultation Paper on Re- view of the MiFID II framework on best execution reports.
TRAction Fintech. (2024). RTS 27 and 28 ▴ The 2024 Status of These Reports in UK and EU.
ICMA. (n.d.). MiFID II/R Fixed Income Best Execution Requirements.
Finance Magnates. (2020). Best Execution and RTS27 and 28 Abandonment in ESMA’s Pipeline.
ESMA. (2021). ESMA promotes coordinated action on the suspension of best execution reports.

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Reflection

The departure from RTS 27 reporting should not be viewed as a dilution of regulatory expectations. It is an evolution. This new landscape demands a more profound and introspective approach to best execution.

It compels firms to look beyond the prescriptive and to cultivate a culture of continuous improvement, one that is deeply embedded in their operational DNA. The challenge now is to transform the abstract principle of best execution into a tangible, demonstrable, and sustainable competitive advantage.

Ultimately, the effectiveness of a firm’s best execution framework will be judged not by the volume of its reports, but by the quality of its outcomes. In this new era, the firms that will succeed are those that embrace the spirit of the regulation, not just the letter of the law. They are the firms that will invest in the technology, the data, and the people needed to build a truly world-class execution capability. They are the firms that will view best execution not as a compliance burden, but as a strategic imperative.