How Do Regulators Use Rts 27 and Rts 28 Reports to Oversee Best Execution?

Concept

The operational challenge of proving best execution has always been a focal point of regulatory scrutiny. The introduction of Regulatory Technical Standards (RTS) 27 and 28 under MiFID II was an attempt to systematize this oversight through a deluge of standardized data. The core premise was that by forcing execution venues and investment firms to publish granular data on execution quality and venue selection, regulators could create a transparent marketplace.

This would theoretically allow for empirical comparison and hold firms accountable for their execution choices. You, as a market participant, were mandated to contribute to a vast data lake, with the expectation that regulators, and even clients, would actively use this information to verify your execution quality.

This system was architected on a belief in radical transparency as the ultimate disinfectant. RTS 27 reports required execution venues, including systematic internalisers, to publish quarterly data detailing price, cost, and likelihood of execution for individual financial instruments. The goal was to provide a standardized benchmark of execution quality across the market.

Concurrently, RTS 28 mandated that investment firms annually summarize and publish their top five execution venues for each class of financial instrument, along with a qualitative assessment of the execution quality achieved. The two reports were designed to be symbiotic a quantitative foundation (RTS 27) supporting a qualitative summary (RTS 28).

The reports were designed to provide a transparent, data-driven framework for assessing whether firms fulfilled their obligation to achieve the best possible outcome for their clients.

However, the operational reality proved far more complex than the architectural design. The sheer volume and complexity of the data contained within RTS 27 reports made them unwieldy and resource-intensive for both the reporting entities and the regulators tasked with their analysis. For regulators, the intended use was to perform macro-level analysis, identify outliers, and detect systemic failures in the best execution framework.

They could, in theory, compare the execution quality data from various venues (via RTS 27) against the venue choices made by a specific firm (via RTS 28) to question why a firm consistently routed orders to a venue that appeared to offer suboptimal execution based on the public data. This process was meant to arm supervisors with the empirical evidence needed to challenge a firm’s execution policy and demand justification for its routing decisions.

Strategy

The regulatory strategy underpinning RTS 27 and RTS 28 was one of market-wide surveillance through mandated disclosure. The intent was to create a self-policing ecosystem where the public availability of execution data would incentivize firms to optimize their execution policies. Regulators would act as overseers of this system, using the reported data as a primary tool for supervision and enforcement. Their approach was structured around several key analytical pillars, even if the practical application was ultimately flawed.

The Intended Regulatory Analysis Framework

Regulators were positioned to use the data from these reports to build a multi-layered view of a firm’s execution practices. This involved a combination of quantitative analysis, qualitative assessment, and cross-firm comparisons.

• Quantitative Benchmarking ▴ The primary use of RTS 27 data was to establish a baseline for execution quality. Regulators could aggregate this data across multiple venues to create implied benchmarks for specific instruments and trade sizes. A firm’s performance, as indicated in its RTS 28 report and internal records, could then be measured against these benchmarks.
• Venue Selection Scrutiny ▴ The RTS 28 report, which lists the top five execution venues used by a firm, was the starting point for a deeper investigation. A regulator could cross-reference this list with the quality metrics from RTS 27 reports. If a firm predominantly used venues that, according to the data, offered higher costs or slower execution speeds, it would trigger a supervisory inquiry.
• Qualitative Policy Review ▴ The summary included in the RTS 28 report was a critical piece of the puzzle. Here, firms had to explain how they had monitored and achieved best execution. Regulators would scrutinize this narrative, comparing the firm’s stated priorities (e.g. price, speed, likelihood of execution) with the actual data. A mismatch between the stated policy and the quantitative evidence of venue choice was a significant red flag.

Why Did the Strategy Fail to Deliver

The strategic vision for RTS 27 and 28 collided with practical realities. Several factors contributed to the eventual decision by European and UK regulators to deprioritize or remove these reporting obligations. The primary issue was the data itself. The reports were found to be overly complex, rarely accessed by clients, and of limited use for meaningful comparisons.

The sheer volume of information made it difficult to extract actionable intelligence, and inconsistencies in formatting across venues hindered comparative analysis. This data overload meant that the intended transparency failed to translate into genuine insight.

Despite the immense effort in their production, the reports were seldom used by the investors they were designed to protect and proved impractical for effective regulatory comparison.

Furthermore, the data was often historical, published months after the trades occurred, reducing its relevance for assessing real-time execution quality. The resources required to produce, publish, and analyze these reports became disproportionate to their perceived benefit. Regulators acknowledged that the framework was not achieving its objective, leading to a strategic pivot.

The focus has now shifted away from standardized public reports and toward a more direct examination of firms’ internal best execution policies and monitoring frameworks. While the reporting obligation has been largely suspended, the core duty of best execution remains, and regulators are expected to supervise it through other means.

What Is the Current Regulatory Strategy

How do regulators supervise best execution now? The emphasis has moved from analyzing public reports to auditing the firm’s internal governance and control framework. Regulators now focus on:

1. The Order Execution Policy ▴ Scrutinizing the policy itself for clarity, detail, and robustness. The policy must clearly articulate how the firm considers the various execution factors.
2. Internal Monitoring and Review ▴ Demanding evidence that the firm is actively monitoring the effectiveness of its execution arrangements and challenging its own venue selection. This includes the processes used by a firm’s compliance and oversight functions.
3. Transaction Cost Analysis (TCA) ▴ Relying more on the firm’s own internal TCA to demonstrate that it is achieving competitive outcomes. Regulators will assess the sophistication and integrity of a firm’s TCA process.

This revised strategy places a greater burden on firms to demonstrate compliance proactively through their own systems and controls, rather than reactively through standardized reporting.

Execution

In the post-RTS 27/28 environment, the execution of regulatory oversight for best execution has become a more nuanced and firm-specific process. The focus has shifted from the analysis of standardized, public data dumps to a direct, evidence-based assessment of a firm’s internal systems, governance, and decision-making architecture. For a firm, demonstrating compliance is now an exercise in proving the robustness of its internal operational framework.

The Anatomy of an RTS 28 Report

To understand what regulators now look for internally, it is instructive to dissect the components of the now-defunct RTS 28 report. This structure provides a blueprint for the kind of internal documentation and analysis that firms must maintain to satisfy supervisory scrutiny. The report was a qualitative and quantitative summary of a firm’s execution practices over the previous year.

The following table outlines the core quantitative information that was required in an RTS 28 report for each class of financial instrument. Firms must still be capable of producing this type of analysis internally.

The Qualitative Summary a Firm’s Internal Defense

The most critical part of the RTS 28 report, and the area of continued regulatory focus, was the qualitative summary. This is where a firm had to articulate its story and defend its execution strategy. A modern compliance file should contain a similar narrative, ready for regulatory review. Key elements include:

• Explanation of Venue Choice ▴ A clear rationale for why the top five venues were selected. This must go beyond simple cost metrics and include factors like liquidity, settlement efficiency, and the firm’s overall strategic relationship with the venue.
• Differentiation for Client Types ▴ An explanation of how execution strategy varies between retail and professional clients. Regulators expect to see a more sophisticated, multi-factor approach for professional clients.
• Role of Costs ▴ A specific discussion on the role of execution costs, clearing fees, and settlement fees in the firm’s analysis. This must also cover any payments received from or made to execution venues.
• Conflicts of Interest ▴ A transparent disclosure of any close links or conflicts of interest with respect to the execution venues used and a description of how these conflicts are managed.

From Public Reports to Internal Audits

How does a regulator execute its oversight function today? The process is now more akin to a forensic audit of a firm’s internal processes. A supervisory visit or inquiry will likely involve a request for the following:

1. The Order Execution Policy Document ▴ The foundational document outlining the firm’s approach.
2. Minutes of Best Execution Committee Meetings ▴ Evidence that the firm is actively and regularly reviewing its execution performance and challenging its own assumptions.
3. Internal Transaction Cost Analysis (TCA) Reports ▴ The firm’s own data and analysis used to monitor execution quality. Regulators will assess the methodology and the outputs of this analysis.
4. Due Diligence Records for Execution Venues ▴ Proof that the firm has a formal process for selecting, monitoring, and reviewing the performance of its execution venues.

The following table illustrates the kind of internal TCA data a firm might present to a regulator to justify its execution strategy for a specific asset class.

In this example, the firm can use the data to explain its choices. It might route speed-sensitive orders to Venue B, while directing orders where price improvement is the key factor to Venue C, despite its slower execution speed. This level of granular, evidence-based justification is the new standard for demonstrating compliance with best execution obligations.

Reflection

The phasing out of RTS 27 and 28 reporting marks a significant evolution in the philosophy of regulatory oversight. The initial hypothesis ▴ that mandated, granular public disclosure would create a self-regulating system for best execution ▴ has been tested and found wanting. The system’s architecture, while theoretically sound, failed to account for the immense practical friction of data complexity and the sheer inertia of market participants.

This shift compels a deeper introspection for any investment firm. The regulatory burden has transformed from a public reporting exercise into a private, continuous demonstration of internal integrity. Your firm’s order execution policy, its governance structures, and its analytical capabilities are now the primary evidence of compliance. The core question moves from “Did you publish the correct report?” to “Can you prove, with robust internal data and a clear narrative, that your execution framework is designed and operated in your clients’ best interests?” This requires a systemic commitment to self-assessment and a culture where execution quality is not just a compliance metric, but a central component of the firm’s operational DNA.