How Does the Removal of RTS 28 Affect a Firm’s Internal Governance?

Concept

The operational calculus of a financial firm’s governance is a system of inputs, processes, and verifiable outputs. The removal of the Regulatory Technical Standard 28, commonly known as RTS 28, represents a fundamental alteration of one of these systemic inputs. It is not a simple subtraction of a compliance task. Instead, it constitutes a powerful shift in the very architecture of accountability for best execution.

The mandate to publish annual reports detailing the top five execution venues was intended as a public-facing mechanism for transparency. The underlying logic was that market forces, guided by this transparency, would compel firms toward optimal execution outcomes for their clients. This mechanism, however, proved to be a flawed component in the system. The reports were resource-intensive to produce and, as regulatory bodies and market participants alike concluded, seldom used for meaningful comparison.

Therefore, its removal is not a signal of deregulation. It is the deliberate replacement of an ineffective, external-facing control with an intensified expectation of a robust, internal, and dynamic governance framework. The core duty of best execution, a pillar of MiFID II, remains unaltered. What has changed is the method of verification.

The burden of proof has migrated from a static, annual public disclosure to a continuous, internal process of monitoring, analysis, and justification. This alters the internal power dynamics and resource allocation of every affected firm. The focus must pivot from demonstrating compliance through report publication to proving execution quality through a rigorous, evidence-based internal audit trail. This is a far more demanding task, requiring a deeper integration of data analytics, risk management, and operational oversight into the fabric of the firm’s governance structure.

The Systemic Function of RTS 28

To understand the impact of its removal, one must first model the intended function of RTS 28 within the broader MiFID II architecture. It was designed as a feedback loop. Firms execute orders, collect data on these executions, analyze the data, and then publicly report on their venue choices and the quality achieved.

This public report was meant to serve two primary audiences ▴ clients, who could theoretically use the data to assess their brokers, and the firms themselves, as a forcing function for self-assessment. The standard mandated a specific format for this disclosure, covering different classes of financial instruments and detailing metrics on price, costs, speed, and likelihood of execution.

The systemic flaw, however, was in the design of the feedback loop itself. The data, while voluminous, lacked the context necessary for true comparability. Different firms employed different methodologies for calculating execution quality, making a direct, apples-to-apples comparison between two RTS 28 reports a futile exercise. Furthermore, the sheer volume and complexity of the reports made them inaccessible to the very clients they were meant to empower.

Institutional clients already possessed far more sophisticated methods for evaluating execution quality, primarily through Transaction Cost Analysis (TCA), rendering the RTS 28 reports largely redundant for their purposes. Consequently, the primary effect of RTS 28 was to create a significant compliance overhead without delivering a commensurate benefit in terms of market transparency or improved client outcomes.

Recalibrating the Governance Architecture

With the removal of this external reporting obligation, the system’s equilibrium shifts. The regulatory expectation does not vanish; it transforms. National Competent Authorities (NCAs) now expect firms to possess an internal governance framework that can demonstrate, at any given moment, that best execution is being systematically achieved and monitored.

This requires a fundamental re-engineering of internal processes. The compliance function, which may have previously focused on the timely and accurate production of the RTS 28 report, must now pivot to a role of active surveillance and validation of the firm’s execution quality monitoring systems.

The removal of RTS 28 reporting shifts the focus from public compliance to internal, evidence-based assurance of best execution.

This recalibration places a greater emphasis on the firm’s internal data infrastructure. Where data collection might have been geared towards populating the specific fields of an RTS 28 report, it must now be architected to support a dynamic, multi-faceted analysis of execution quality. This includes capturing a richer set of data points, such as order fill rates, price improvement statistics, and detailed breakdowns of implicit costs like market impact. The governance structure must evolve to effectively utilize this data, establishing clear lines of responsibility for reviewing execution quality, challenging suboptimal outcomes, and documenting the rationale behind venue selection.

What Is the True Nature of Best Execution Post RTS 28?

Best execution, in the absence of RTS 28’s prescriptive reporting, returns to its core principles. It is the obligation for a firm to take all sufficient steps to obtain the best possible result for its clients, taking into account a range of execution factors. These factors include not only the explicit costs of execution but also price, speed, likelihood of execution and settlement, size, nature of the order, and any other consideration relevant to the execution of the order.

The removal of RTS 28 elevates the importance of the qualitative aspects of this obligation. A firm’s governance framework must now be able to articulate and defend its execution policy, not just in terms of the quantitative data it produces, but also in terms of the strategic decisions it makes regarding venue selection and order routing.

This creates a more nuanced and demanding governance challenge. A firm must be able to demonstrate, for example, why it chooses to route certain orders to a dark pool, a systematic internaliser, or a lit market. This requires a deep understanding of market microstructure and a sophisticated framework for assessing the trade-offs between different execution venues. The internal governance process must be able to document this decision-making process, creating an auditable trail that justifies the firm’s execution strategy in the context of its overarching duty to its clients.

Strategy

The strategic response to the obsolescence of RTS 28 reporting must be architected around a central principle ▴ the internalization of accountability. Firms that previously viewed best execution through the prism of an annual, public-facing compliance report must now construct a dynamic, internal system of control and continuous improvement. This is not a matter of simply reallocating the resources once dedicated to RTS 28 production.

It requires a strategic realignment of technology, human capital, and governance processes to create a framework that is demonstrably superior to the one it replaces. The objective is to build a system that provides regulators with confidence and clients with superior outcomes, all while enhancing the firm’s own understanding of its execution footprint.

A successful strategy involves a multi-pronged approach. It begins with a fundamental reassessment of the firm’s best execution policy. This policy can no longer be a static document that is reviewed annually. It must become a living framework that adapts to changing market conditions, new execution technologies, and the evolving needs of the firm’s clients.

The strategy must then translate this policy into a set of concrete operational processes, supported by a robust data and analytics infrastructure. Finally, the strategy must establish a clear and effective governance structure to oversee the entire process, ensuring that the firm is not only meeting its regulatory obligations but also continuously optimizing its execution performance.

Evolving the Best Execution Policy

The first step in this strategic realignment is to evolve the best execution policy from a compliance document into a strategic charter. This means moving beyond a simple recitation of the regulatory requirements and creating a document that clearly articulates the firm’s philosophy and approach to achieving best execution. The policy should detail the relative importance of the various execution factors for different types of clients and financial instruments. For example, for a large institutional client executing a block trade in an illiquid stock, the likelihood of execution and the minimization of market impact may be the most important factors, while for a retail client executing a small trade in a liquid stock, speed and explicit cost may be paramount.

The policy must also provide a detailed methodology for how the firm assesses the quality of its execution. This should include a description of the quantitative metrics the firm uses to monitor its performance, such as effective spread, price improvement, and slippage. It should also outline the qualitative factors the firm considers, such as the quality of a venue’s clearing and settlement processes or its resilience to market stress. This level of detail provides a clear framework for the firm’s internal monitoring processes and demonstrates to regulators that the firm has a sophisticated and well-considered approach to best execution.

From Static Reporting to Dynamic Monitoring

The core of the new strategy lies in the transition from static, backward-looking reporting to dynamic, real-time monitoring. This requires a significant investment in technology and data analytics. Firms must build or acquire systems that can capture and analyze execution data on a continuous basis, providing the front office and compliance functions with timely and actionable insights. These systems should be capable of generating a range of reports and dashboards that allow the firm to monitor its performance against its own internal benchmarks and against the broader market.

A firm’s governance framework must be able to articulate and defend its execution policy, not just in terms of quantitative data, but also in terms of strategic decisions.

The table below illustrates the strategic shift in data and monitoring philosophy:

This shift requires a new set of capabilities. Firms need to develop expertise in areas such as data science and quantitative analysis to build and maintain these systems. They also need to foster a culture of data-driven decision-making, where the insights generated by these systems are used to inform trading strategies and improve client outcomes. The goal is to create a virtuous circle, where better data leads to better analysis, which in turn leads to better execution, further enriching the dataset.

Strengthening the Governance Framework

A sophisticated data and analytics infrastructure is necessary but not sufficient. It must be embedded within a strong governance framework that ensures the insights it generates are acted upon. This means establishing clear roles and responsibilities for overseeing best execution.

Many firms have established a Best Execution Committee, composed of senior representatives from the front office, compliance, risk, and technology. This committee should be responsible for reviewing the firm’s execution performance, approving changes to the best execution policy, and overseeing the firm’s relationships with its execution venues.

The governance framework must also include a clear process for escalating and resolving any issues that are identified through the firm’s monitoring processes. If the data reveals that a particular execution venue is consistently delivering poor outcomes, for example, there must be a process for investigating the issue, engaging with the venue to seek improvements, and, if necessary, removing the venue from the firm’s list of approved execution venues. This process should be fully documented, creating a clear audit trail that demonstrates the firm’s commitment to proactively managing its execution quality.

The following list outlines key components of a strengthened internal governance structure:

• Best Execution Committee ▴ A cross-functional body with ultimate responsibility for oversight. Its charter should define its membership, meeting frequency, and decision-making authority.
• Documented Venue Selection Process ▴ A formal methodology for adding, reviewing, and removing execution venues. This process should be based on a comprehensive assessment of each venue’s capabilities and performance.
• Internal Audit Program ▴ A dedicated audit function to periodically and independently test the effectiveness of the firm’s best execution monitoring and governance processes.
• Training and Competence ▴ A program to ensure that all relevant staff, from traders to compliance officers, understand their responsibilities under the firm’s best execution policy.

Execution

The execution phase of adapting to a post-RTS 28 environment is where strategic theory is forged into operational reality. It is about instrumenting the firm’s trading and compliance architecture to function as a self-auditing system. The objective is to create a demonstrable, evidence-based culture of best execution that permeates every level of the organization.

This requires a granular focus on the data, the analytical tools, and the procedural workflows that translate the firm’s best execution policy into a set of repeatable and verifiable actions. The successful execution of this strategy hinges on the ability to not only capture the right data but also to transform that data into actionable intelligence that drives continuous improvement.

This section provides a deep dive into the practical mechanics of building this internal governance framework. It will cover the specific data points that need to be captured, the analytical techniques that should be employed, and the design of the internal reporting and oversight processes. The focus here is on the tangible steps a firm must take to build a system that is not only compliant with the spirit of MiFID II but also provides a genuine competitive advantage through superior execution quality.

The Operational Playbook for Internal Monitoring

The cornerstone of the new execution framework is a detailed operational playbook that codifies the firm’s approach to best execution monitoring. This playbook should be a practical guide for everyone involved in the execution process, from the trader on the desk to the compliance officer in the back office. It should specify the exact procedures for monitoring execution quality, investigating potential issues, and documenting the firm’s decision-making process. The playbook is the blueprint for the firm’s internal control system.

A key element of this playbook is the definition of the firm’s internal “standard of care.” This is the benchmark against which all executions are measured. This standard should be multi-dimensional, incorporating not only the explicit costs of trading but also a range of implicit costs and qualitative factors. For example, the standard might specify acceptable thresholds for slippage against the arrival price, targets for price improvement, and minimum standards for the technological resilience of an execution venue. By defining this standard in detail, the firm creates a clear and objective basis for assessing its performance.

How Should a Firm Structure Its Internal Data Analysis?

The analysis of execution data must be both comprehensive and targeted. It is not enough to simply calculate a few high-level metrics. The firm must be able to drill down into the data to understand the drivers of its execution performance.

This requires a sophisticated analytical engine that can slice and dice the data by a variety of dimensions, including asset class, order type, client category, and execution venue. The goal is to identify patterns and anomalies that may indicate opportunities for improvement or potential areas of concern.

The table below provides a sample structure for an internal execution quality dashboard, highlighting the key metrics that a firm should be tracking.

This type of detailed analysis allows the firm to move beyond simple compliance and into the realm of active performance management. For example, by analyzing fill rates by venue, the firm can identify which venues are most effective for different types of orders and adjust its routing logic accordingly. By tracking slippage, the firm can identify traders or algorithms that may be creating undue market impact and provide them with additional training or guidance.

System Integration and Technological Architecture

The execution of this strategy is heavily dependent on the firm’s technological architecture. The various systems involved in the trading lifecycle, from the Order Management System (OMS) to the execution venues and the post-trade processing systems, must be tightly integrated to ensure a seamless flow of data. The firm’s data architecture must be designed to capture and store a rich set of time-stamped data for every order, including all order modifications, cancellations, and executions. This data is the raw material for the firm’s analytical engine.

The successful execution of a post-RTS 28 strategy hinges on transforming captured data into actionable intelligence for continuous improvement.

A modern best execution framework requires a technology stack that can support real-time data ingestion, complex event processing, and advanced analytics. Many firms are turning to specialized third-party vendors for these capabilities, leveraging their expertise and economies of scale. Whether built in-house or sourced from a vendor, the system must be flexible and scalable enough to adapt to the firm’s evolving needs and the changing market environment. The ultimate goal is to create a single source of truth for all execution-related data, providing a comprehensive and auditable record of the firm’s trading activity.

The following list details the critical technological components required:

1. Centralized Data Hub ▴ A repository for capturing and normalizing all order and execution data from various internal and external sources. This should include high-precision timestamping capabilities.
2. Transaction Cost Analysis (TCA) Engine ▴ A sophisticated analytical tool for calculating a wide range of execution quality metrics and benchmarking performance against various reference points.
3. Rules-Based Alerting System ▴ An automated system for flagging executions that breach predefined thresholds or deviate from expected patterns, allowing for real-time investigation.
4. Reporting and Visualization Layer ▴ A flexible reporting tool that can generate a variety of dashboards and reports for different internal stakeholders, from the trading desk to the board room.

By investing in this technological foundation, a firm can transform the challenge of best execution from a regulatory burden into a source of competitive strength. It enables a proactive, data-driven approach to managing execution quality that not only satisfies regulators but also delivers tangible benefits to the firm and its clients.

Reflection

The dismantling of the RTS 28 reporting framework should prompt a period of critical self-assessment within every investment firm. It compels a shift in perspective, moving the measure of diligence from the public performance of compliance to the private, rigorous cultivation of an evidence-based operational culture. The core question for any leadership team is no longer “Have we filed the correct report?” but rather “Can we prove, with high-fidelity data and a defensible methodology, that our execution framework consistently serves our clients’ best interests?”

This transition elevates the conversation beyond mere regulatory adherence. It forces an examination of the firm’s entire execution architecture ▴ its technology, its analytical capabilities, its governance structures, and, most importantly, its culture. Viewing best execution not as a constraint but as a domain for optimization is the hallmark of a sophisticated market participant. The data infrastructure built to satisfy this new paradigm of internal accountability becomes a strategic asset, offering insights that can enhance trading performance, manage risk more effectively, and ultimately, deepen client trust.

The removal of a flawed metric provides the opportunity to build a superior system of intelligence. The ultimate test is whether a firm seizes this opportunity to engineer a true operational edge.