How Does the Absence of RTS 28 Affect Regulatory Scrutiny of Best Execution?

Concept

The operational challenge of demonstrating superior execution quality has entered a new phase. With the formal deprioritization of the Regulatory Technical Standard 28 (RTS 28) reports by the European Securities and Markets Authority (ESMA) and the Financial Conduct Authority (FCA), the framework for regulatory oversight has fundamentally pivoted. This development signals a departure from a compliance model centered on standardized, public disclosures toward a system demanding a more profound and integrated demonstration of a firm’s execution processes. The core obligation to achieve the best possible result for clients has not diminished; rather, the method of its verification has matured.

RTS 28 was conceived as a transparency tool under the MiFID II framework. It mandated that investment firms annually publish reports detailing their top five execution venues for each class of financial instrument, alongside a summary of the execution quality obtained. The intention was to arm investors with comparable data to assess their brokers’ performance. However, extensive feedback from market participants revealed a significant disconnect between intent and utility.

These reports were found to be costly to produce, seldom used by end investors, and ultimately ineffective at providing meaningful comparative insights. Their removal, therefore, is an acknowledgment of this reality.

The absence of this reporting mandate reshapes the terrain of regulatory scrutiny. The focal point of a regulator’s inquiry now shifts from a static, annual report to the dynamic, living ecosystem of a firm’s internal governance and execution decision-making. It elevates the importance of a firm’s ability to articulate and evidence its execution policy, not as a document, but as a consistently applied operational protocol. The fundamental question from regulators evolves from “Did you publish the correct report?” to “Can you demonstrate, with robust evidence, that your execution arrangements are designed and operated to consistently deliver the best outcome for your clients?”.

The removal of RTS 28 reframes regulatory oversight from a review of standardized disclosures to an examination of a firm’s intrinsic execution quality framework.

The Enduring Mandate of Best Execution

It is a profound misinterpretation to view the discontinuation of RTS 28 as a relaxation of best execution standards. On the contrary, regulators have been explicit in their communications ▴ the underlying principles of best execution remain a primary supervisory priority. The core duty stipulated in MiFID II ▴ to take all sufficient steps to obtain the best possible result for clients, considering price, costs, speed, likelihood of execution and settlement, size, nature, or any other relevant consideration ▴ is unaltered. What has changed is the nature of the evidence required to substantiate compliance.

This paradigm requires firms to look inward, reinforcing the systems that govern how execution decisions are made, monitored, and reviewed. The emphasis moves from a retrospective, data-dumping exercise to a proactive, continuous process of self-assessment and optimization. Regulatory scrutiny now penetrates deeper into the fabric of a firm’s operations, demanding a coherent narrative backed by verifiable data that explains how execution strategies are tailored to client needs and market conditions. The burden of proof has become more qualitative and holistic, demanding a synthesis of data and process.

Strategy

The strategic imperative for investment firms following the cessation of RTS 28 reporting is a pivot from a compliance-as-reporting posture to a compliance-as-a-system approach. This entails architecting and maintaining a demonstrable ecosystem of best execution governance. The focus must shift from the production of an annual, public-facing artifact to the cultivation of a robust, internal framework that can withstand deep regulatory inspection at any time. The strategic objective is to build a system where the evidence of best execution is a natural output of daily operations, not a year-end administrative task.

This strategic reorientation demands that firms re-evaluate how they integrate the core tenets of best execution into their operational DNA. The “four-fold test” of price, costs, speed, and likelihood of execution remains the bedrock of the assessment, but its application requires a more sophisticated and dynamic calibration. Firms must be able to articulate how they weigh these factors for different financial instruments, client types, and prevailing market environments.

A strategy that is effective for a liquid equity order during stable market conditions may be entirely inappropriate for an illiquid derivative during a period of volatility. The ability to evidence this nuanced decision-making process is now paramount.

A New Framework for Demonstrating Compliance

A successful strategy involves creating a comprehensive and self-reinforcing governance loop. This system is built on several key pillars that, working in concert, provide a powerful body of evidence for regulators.

• Enhanced Governance and Oversight ▴ The role of a dedicated Best Execution Committee or equivalent governance forum becomes central. These bodies must meet regularly, with detailed minutes capturing their review of execution quality, analysis of venue performance, and any decisions made to alter execution arrangements. These minutes are no longer just internal records; they are primary evidence for regulatory review.
• Dynamic Policy Management ▴ A firm’s best execution policy cannot be a static document. It must be a living framework that is reviewed and updated in response to market structure changes, new execution technologies, or shifts in the firm’s business. The process for reviewing and approving these changes, and the rationale behind them, must be meticulously documented.
• Systematic Venue and Broker Analysis ▴ The process of selecting and monitoring execution venues and brokers must be rigorous and evidence-based. This involves initial due diligence and ongoing performance monitoring against a range of quantitative and qualitative criteria. Firms must be able to demonstrate why their chosen venues are the most appropriate for their clients’ order flow.

The following table illustrates the strategic shift in focus for compliance activities:

The strategic challenge is to transform best execution from a periodic reporting obligation into a continuous, evidence-generating operational discipline.

The Centrality of Transaction Cost Analysis

In this new landscape, Transaction Cost Analysis (TCA) evolves from a useful tool to a strategic necessity. While RTS 28 provided a high-level, aggregated view, TCA offers the granular, trade-level data needed to conduct a meaningful analysis of execution quality. A sophisticated TCA framework allows a firm to measure its performance against a variety of benchmarks, compare execution outcomes across different venues and brokers, and identify areas for improvement.

A robust TCA program becomes a cornerstone of the firm’s ability to meet its evidentiary burden. It provides the quantitative foundation upon which the qualitative narrative of best execution is built. For regulators, the ability of a firm to produce detailed TCA reports, and to demonstrate how that analysis informs its execution policies and venue selection, is a powerful indicator of a mature and effective best execution framework.

Execution

In the absence of the prescriptive RTS 28 reporting template, the execution of a compliant best execution framework becomes a matter of building a comprehensive internal evidentiary file. This file must be a living repository, continuously updated, that tells a clear and compelling story of how the firm fulfills its duty to clients. Regulatory scrutiny will now probe the quality and completeness of this internal documentation, making its meticulous construction a critical operational function.

The core of this execution lies in systematically capturing, organizing, and analyzing a wide array of data points that collectively demonstrate the firm’s commitment to achieving the best possible outcomes. This process moves far beyond simple record-keeping. It requires the integration of quantitative data with qualitative assessments to form a holistic and defensible narrative. Firms must operate under the assumption that they could be asked at any point to produce this evidence and explain how it guided their decision-making process.

Constructing the Evidentiary Record

The operational task is to assemble a body of evidence that addresses every facet of the best execution obligation. This record should be structured, accessible, and ready for regulatory inspection. The key components of this record are non-negotiable for firms seeking to demonstrate robust compliance.

1. Quantitative Execution Data ▴ This is the bedrock of the evidentiary file. It involves the systematic collection and analysis of trade data to measure performance. Sophisticated Transaction Cost Analysis (TCA) is the primary tool here. The analysis should cover a range of metrics, including arrival price, volume-weighted average price (VWAP), implementation shortfall, and spread capture. This data must be analyzed across different venues, brokers, order types, and market conditions to provide a complete picture of execution quality.
2. Qualitative Assessments and Due Diligence ▴ Alongside the hard numbers, firms must document their qualitative reasoning. This includes detailed due diligence files on all execution venues and brokers, outlining the rationale for their selection. It should also include documented analysis of factors that are not easily quantifiable, such as the stability of a venue’s technology, its creditworthiness, or the quality of its settlement processes.
3. Governance and Decision-Making Records ▴ This is the narrative thread that connects the data to the firm’s policies. It includes the terms of reference for the Best Execution Committee, detailed minutes of all meetings, and records of any challenges, discussions, and decisions made. Any changes to the firm’s best execution policy or venue list must be accompanied by a clear record of the analysis and approval process.

The following table provides a granular view of the types of evidence that firms must now prioritize for collection and maintenance:

A firm’s ability to produce a detailed and coherent evidentiary record on demand is the new benchmark for compliance in a post-RTS 28 world.

The Role of Technology in a Principles-Based Regime

Executing a robust, evidence-based compliance strategy in the absence of RTS 28 is nearly impossible without the leverage of technology. Manual processes for data collection, analysis, and reporting are too slow, prone to error, and lack the scalability to handle modern trading volumes. Technology provides the operational backbone for the new compliance paradigm.

Investment in sophisticated data analytics and surveillance systems is essential. These platforms can automate the ingestion of trade data, perform complex TCA calculations in near real-time, and generate the reports needed for internal governance and regulatory requests. Furthermore, modern surveillance systems can flag orders that may have received suboptimal execution, allowing for proactive investigation and remediation. By embedding the requirements of the best execution framework into the firm’s technological infrastructure, compliance becomes an integrated function of the trading process itself, rather than a separate, after-the-fact review.

Reflection

The dissolution of the RTS 28 reporting mandate presents a moment for profound institutional introspection. It compels a shift in perspective, from viewing compliance as an external obligation to be satisfied, to understanding it as an internal discipline to be mastered. The critical question for any firm is no longer about fulfilling a reporting template, but about the intrinsic quality and defensibility of its own operational systems. Does the firm’s execution framework generate the necessary evidence as a natural consequence of its design, or does it require a frantic scramble for data when regulators inquire?

This new environment separates firms that have merely been compliant from those that have built a true culture of execution excellence. The absence of a standardized public report places a greater weight on the coherence and integrity of a firm’s internal narrative. It requires a seamless integration of policy, governance, data analytics, and technology.

The ultimate test is whether the entire system, when scrutinized, demonstrates an unwavering and systematic effort to achieve the best possible outcomes for clients. The knowledge gained is a component in a larger system of intelligence, where a superior operational framework provides the ultimate strategic edge.