How Does MiFID II Change the Evidentiary Burden for Best Execution in RFQ Trading? ▴ Question

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Concept

The implementation of MiFID II fundamentally re-architected the system of proof for best execution, particularly within the request for quote protocol. The directive shifted the entire axis of compliance from a qualitative, process-oriented demonstration to a quantitative, data-driven mandate. Before this regulatory overhaul, a firm could often satisfy its obligation by documenting a coherent execution policy and demonstrating its consistent application. The evidentiary burden was centered on the integrity of the firm’s internal process.

MiFID II dissolved that paradigm. It installed a new framework where the quality of execution is a measurable, reportable, and defensible outcome. For RFQ trading, this means the simple act of soliciting quotes from multiple counterparties is no longer sufficient proof of diligence.

The regulation requires firms to construct and maintain a robust data architecture capable of capturing not just the quotes received, but a wide spectrum of contextual market data at the moment of execution. This system must provide empirical evidence that the chosen quote represented the best possible result for the client, measured against a range of execution factors.

The core change introduced by MiFID II is the transition from demonstrating procedural diligence to proving optimal execution outcomes with verifiable data.

This shift imposes a significant operational and technological load. Firms must now systematically record and analyze every step of the RFQ lifecycle. This includes capturing timestamps for quote requests and responses, the full set of prices received, and data on execution speed and likelihood. The directive effectively transformed the compliance function from a periodic review of policies to a continuous, near-real-time monitoring of execution data.

The evidentiary burden is now a constant, demanding that firms be able to reconstruct any trade and justify the execution decision with a comprehensive, data-rich audit trail. The focus is on demonstrating that “all sufficient steps” were taken to achieve the optimal client outcome.

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Strategy

Adapting to the heightened evidentiary requirements of MiFID II necessitates a strategic overhaul of a firm’s execution framework. The objective is to build a system that is compliant by design, embedding data capture and analysis into the very fabric of the RFQ workflow. This moves beyond mere box-checking to create a sustainable, defensible execution architecture.

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Constructing a Defensible Execution Policy

The foundation of a MiFID II-compliant strategy is the execution policy itself. This document is no longer a static statement of intent; it is a dynamic operational blueprint. For RFQ trading, the policy must explicitly detail the criteria used to select counterparties for a quote request and the factors that determine the final execution decision. These factors extend beyond price to include costs, speed, likelihood of execution, settlement, size, and any other relevant consideration.

A critical strategic decision is determining the relative importance of these execution factors for different financial instruments, client types, and market conditions. For a highly liquid government bond, price and cost may be paramount. For a large, illiquid corporate bond block, the likelihood of execution and minimizing market impact might take precedence. The policy must articulate this logic clearly, providing a clear rationale that can be demonstrated to regulators.

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What Is the Required Data Infrastructure?

The strategy must be supported by a robust data infrastructure capable of meeting the rigorous demands of MiFID II. This system serves as the firm’s central nervous system for execution quality monitoring. Its primary function is to capture, store, and analyze the vast amounts of data required to prove best execution.

This involves integrating data feeds from multiple sources, including:

Internal Systems ▴ The firm’s Order Management System (OMS) and Execution Management System (EMS) must provide detailed records of every stage of the order lifecycle.
Counterparty Data ▴ All quotes received in response to an RFQ must be captured, including price, size, and timestamp. This includes quotes that were not executed.
Market Data ▴ The system requires access to a consolidated view of market prices at the time of execution. This provides the necessary context to evaluate the quality of the executed price against the broader market.

The table below outlines the strategic shift in data requirements for RFQ trading from the pre-MiFID II era to the current environment.

Data Requirement	Pre-MiFID II Approach	MiFID II Mandated Strategy
Quote Capture	Manual or semi-automated logging of winning quote.	Systematic, automated capture of all quotes received from all counterparties, including timestamps.
Market Context	General reliance on trader’s knowledge of market conditions.	Verifiable snapshots of relevant market data (e.g. composite best bid/offer) at the precise time of execution.
Cost Analysis	Focus on explicit commissions and fees.	Total cost analysis, including all explicit and implicit costs (e.g. settlement fees, clearing costs).
Proof of Diligence	Documentation of having solicited multiple quotes.	Quantitative analysis demonstrating why the executed quote was the best possible result based on the firm’s stated execution factors.

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The Role of Transaction Cost Analysis

A cornerstone of the MiFID II strategy is the systematic use of Transaction Cost Analysis (TCA). TCA provides the quantitative framework for assessing execution quality. For RFQ workflows, TCA involves comparing the executed price against a range of benchmarks.

A common benchmark is the arrival price, which is the mid-price of the instrument at the time the order was received. Another is the implementation shortfall, which measures the total cost of execution relative to the price at the time the investment decision was made.

A successful MiFID II strategy transforms the compliance function from a historical reporting exercise into a proactive, data-driven system for optimizing execution quality.

By regularly performing TCA on RFQ trades, a firm can identify trends in execution quality, assess the performance of different counterparties, and refine its execution policy. This analytical rigor provides the hard evidence required to satisfy regulators and demonstrate a commitment to achieving the best possible results for clients.

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Execution

The execution of a MiFID II-compliant best execution framework for RFQ trading is a matter of precise operational engineering. It requires the deployment of specific technologies, the implementation of rigorous data governance protocols, and the establishment of a continuous monitoring and review cycle. The objective is to create a fully auditable, data-rich environment that can withstand regulatory scrutiny.

Operational Playbook for a Compliant RFQ Workflow

Building a defensible RFQ process under MiFID II involves a series of interconnected operational steps. This playbook outlines the critical components for a compliant system.

Counterparty Management ▴ Firms must maintain a dynamic and evidence-based process for selecting and evaluating the counterparties included in their RFQ pools. This involves more than simply adding approved liquidity providers. It requires ongoing monitoring of their performance against the firm’s defined execution factors. Key metrics include response times, quote competitiveness, and fill rates. This data should be used to regularly review and update the list of eligible counterparties for different asset classes.
Pre-Trade Data Capture ▴ Before an RFQ is sent, the system must capture a snapshot of the prevailing market conditions. This includes the composite best bid and offer from available market data sources. This pre-trade snapshot serves as a crucial benchmark against which the received quotes will be measured. It provides the initial piece of evidence for the market context at the time of the order.
RFQ Dissemination and Response Logging ▴ The execution system must log the exact time the RFQ is sent to each counterparty. As responses are received, every quote must be captured and timestamped. This includes the price, quantity, and any associated conditions. It is operationally critical that the system logs all quotes, including those that are ultimately rejected. This complete record of the auction process is fundamental to the evidentiary burden.
Execution Justification and Post-Trade Analysis ▴ At the point of execution, the system should facilitate the documentation of the decision. While the data should speak for itself, for large or complex trades, a trader’s annotation can provide valuable context. Immediately following execution, the system should perform an initial TCA calculation, comparing the execution price against the pre-trade snapshot and other relevant benchmarks. This provides an immediate feedback loop on execution quality.

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How Does Reporting Solidify the Evidentiary Trail?

While recent regulatory updates have altered the specific obligations for publishing RTS 27 and RTS 28 reports, the underlying data collection and analysis capabilities remain essential for demonstrating best execution. The principles behind these reports provide a blueprint for the data points a firm must be able to produce upon request from a National Competent Authority (NCA).

The data architecture built to support these reporting requirements is the core of the firm’s evidentiary framework. It must be capable of generating detailed reports that summarize execution quality across various dimensions. The table below details the specific data fields that a firm’s system should be able to produce for its RFQ flow, mirroring the logic of the RTS 27/28 framework.

Data Category	Specific Data Points for RFQ Execution	Evidentiary Purpose
Price	Executed price; best bid and offer at time of execution; all quotes received; VWAP over specified intervals.	To demonstrate the competitiveness of the executed price against both the competing quotes and the broader market.
Costs	All explicit fees, commissions, clearing and settlement costs associated with the execution.	To provide a complete picture of the total consideration for the trade, fulfilling a key component of the best execution analysis.
Speed	Timestamp of RFQ request; timestamp of each quote response; timestamp of execution.	To analyze counterparty performance and justify decisions where speed of execution was a critical factor.
Likelihood of Execution	Number of quotes requested vs. received; historical fill rates for specific counterparties and instruments.	To justify the selection of counterparties based on their reliability, especially for illiquid instruments or large order sizes.

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System Integration and Governance

Achieving this level of operational readiness requires deep integration between a firm’s trading and compliance systems. The OMS, EMS, and any proprietary RFQ platforms must communicate seamlessly to ensure data integrity. Data governance becomes a critical function, with clear policies for data validation, storage, and retrieval.

The ultimate execution of a MiFID II strategy is an environment where regulatory compliance is an automated byproduct of a system designed for optimal performance.

Firms must also establish a formal governance committee responsible for overseeing the best execution framework. This committee should meet regularly to review TCA reports, assess the effectiveness of the execution policy, and approve any necessary changes to the firm’s procedures or counterparty lists. This formal oversight structure provides the final layer of evidence, demonstrating that the firm is not just collecting data, but actively using it to uphold its duty to its clients.

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References

ESMA. “MiFID II Best Execution Q&As.” ESMA70-872942901-38, European Securities and Markets Authority, 2017.
Financial Conduct Authority. “Best execution and payment for order flow.” FCA Handbook, COBS 11.2, 2018.
Hill, Andy. “MiFID II/R Fixed Income Best Execution Requirements.” International Capital Market Association, 2016.
Lehalle, Charles-Albert, and Sophie Moinas. “Strategic Liquidity Seeking.” Market Microstructure ▴ Confronting Many Viewpoints, edited by Frédéric Abergel et al. John Wiley & Sons, 2012, pp. 199-222.
Madhavan, Ananth. “Execution, Liquidity, and Market Structure.” Handbook of Financial Econometrics, Vol. 1, edited by Yacine Aït-Sahalia and Lars Peter Hansen, Elsevier, 2009, pp. 639-689.
O’Hara, Maureen. Market Microstructure Theory. Blackwell Publishers, 1995.
European Commission. “Commission Delegated Regulation (EU) 2017/575.” Official Journal of the European Union, 2017. (Pertains to RTS 27)
European Commission. “Commission Delegated Regulation (EU) 2017/576.” Official Journal of the European Union, 2017. (Pertains to RTS 28)

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Calibrating the Execution Architecture

The architectural shift mandated by MiFID II presents a profound question for any trading entity. The regulation compels a move from a philosophy of diligence to a system of proof. The core challenge is one of internal engineering ▴ how does a firm construct an operational framework where the immense data requirements become a source of strategic advantage? The systems built to satisfy this evidentiary burden are the same systems that can illuminate counterparty performance, refine execution strategies, and ultimately enhance client outcomes.

The regulation provides the blueprint for a more sophisticated execution engine. The ultimate task is to build it, not as a compliance apparatus, but as the central pillar of the firm’s trading intelligence.