How Has the Deprioritization of Rts 28 Reporting Affected Best Execution Obligations?

Concept

The operational landscape of European financial markets is undergoing a significant recalibration. At the center of this shift is the formal deprioritization of Regulatory Technical Standard 28 (RTS 28) reporting, a mechanism originally designed to bring transparency to the execution quality of investment firms. This development does not exist in a vacuum; it represents a fundamental re-evaluation of how best execution is defined, monitored, and enforced.

The core obligation for investment firms to act in their clients’ best interests remains an unassailable pillar of the regulatory framework. The change lies in the methodology of demonstrating compliance, moving away from a prescriptive, public reporting model to a more principles-based, internally-driven process.

RTS 28 was introduced under the MiFID II framework and mandated that investment firms publicly disclose their top five execution venues for each class of financial instrument, alongside a qualitative summary of the execution quality obtained. The intent was to empower investors with data to compare brokers and hold them accountable, fostering a competitive environment that would theoretically lead to better outcomes. However, the practical application of these reports fell short of its objective.

The consensus among market participants and regulators grew to be that the reports were seldom read by end-investors and the aggregated, generalized data they contained failed to provide a meaningful basis for comparison. The data was often too generic, aggregating diverse client orders and thereby obscuring the specific execution quality relevant to any single institutional client’s strategy.

The removal of the RTS 28 mandate signals a pivotal transition from a compliance culture of box-ticking to one centered on demonstrable, evidence-based execution quality frameworks.

Understanding this transition requires a systemic view. The deprioritization, officially signaled by the European Securities and Markets Authority (ESMA) in early 2024, directs national competent authorities (NCAs) to cease prioritizing supervisory actions against firms that do not produce these reports. This effectively sunsets the requirement, even as the formal legislative process to remove it from MiFID II concludes. This action follows the precedent set in the UK, which had already moved to abolish RTS 28 reporting obligations.

The critical point is that this regulatory relaxation on a specific reporting output amplifies the responsibility of the firm. The burden of proof for best execution now rests more squarely on the firm’s internal governance, policies, and analytical capabilities. It is a shift from public disclosure to internal demonstration, demanding a more sophisticated and robust approach to managing and evidencing execution strategy.

Strategy

A New Locus of Execution Accountability

The dismantling of the RTS 28 reporting regime compels a strategic re-architecture of how investment firms approach their best execution obligations. The focus migrates from the production of a standardized, public-facing artifact to the cultivation of a dynamic, internal, and evidence-based execution quality process. This is a profound strategic pivot.

The absence of a prescriptive reporting template means firms must now design and operate their own frameworks to continuously monitor, analyze, and justify their execution decisions. The core tenet of acting in a client’s best interest is unchanged, but the methodology for proving it has become a matter of internal strategic design.

A primary consequence is the elevated importance of Transaction Cost Analysis (TCA). While TCA has long been a component of institutional trading, its role is now central to the best execution narrative. Firms are compelled to move beyond basic TCA metrics and develop more sophisticated analytical capabilities.

This involves not just measuring slippage against arrival price, but also incorporating a wider set of factors into the analysis, such as the implicit costs of information leakage, opportunity costs of unfilled orders, and the impact of venue selection on overall portfolio performance. The strategic imperative is to build a TCA function that can provide a holistic and defensible rationale for the execution strategy employed for different types of orders and asset classes.

With the external reporting mandate gone, the internal analytical framework becomes the primary tool for both regulatory compliance and competitive differentiation.

From Static Reports to Dynamic Frameworks

The transition away from RTS 28 necessitates a move from a static, annual reporting cycle to a dynamic, ongoing monitoring system. This requires a strategic investment in both technology and expertise. Firms must now be capable of capturing, storing, and analyzing granular execution data in near real-time. The strategic objective is to create a feedback loop where execution data continuously informs and refines the firm’s order routing policies and venue selection logic.

This strategic shift is best understood by comparing the old and new paradigms:

The new strategic approach also places a greater emphasis on the qualitative aspects of execution, but in a more meaningful way than the RTS 28 summaries. Firms must now be able to articulate and evidence their venue selection criteria, considering factors such as liquidity, resilience, clearing arrangements, and counterparty risk. This requires a deeper, more strategic engagement with execution venues and brokers, moving beyond a simple cost-based analysis.

• Broker and Venue Review ▴ The process of evaluating execution partners becomes more rigorous. Firms must develop a structured methodology for assessing the full spectrum of services provided, not just the execution price.
• Smart Order Routing (SOR) Logic ▴ The logic underpinning automated order routing systems must be transparent, defensible, and regularly reviewed to ensure it aligns with the firm’s best execution policy.
• Governance and Oversight ▴ A clear governance structure, with defined roles and responsibilities for overseeing the best execution process, is a critical strategic component. This includes regular reviews by senior management and compliance functions.

Execution

The Operational Mandate for Demonstrable Compliance

In the absence of the prescriptive RTS 28 report, the execution of a best execution policy transforms into a continuous, data-intensive operational discipline. The focus shifts from producing a document to maintaining a living, auditable system that proves adherence to the best execution mandate on a day-to-day basis. The operational imperative is to construct a robust internal framework that can withstand regulatory scrutiny and provide concrete evidence that client interests are being systematically prioritized. This requires a granular approach to data management and a commitment to quantitative analysis as the bedrock of the execution process.

The operational workflow must be re-engineered to capture a more comprehensive set of execution data points. This extends far beyond the top-level metrics reported under RTS 28. Firms must now operationally manage and analyze data related to the entire lifecycle of an order, from its arrival to its final execution and settlement. This includes capturing timestamps at each stage, recording the specific routing decisions made by traders or algorithms, and logging the prevailing market conditions at the time of execution.

Quantitative Proof Points in the New Regime

The operational execution of best execution now hinges on the ability to produce quantitative evidence on demand. This means that the firm’s systems must be configured to track and report on a variety of execution quality metrics. The following table outlines some of the key data points that have become critical in the post-RTS 28 environment:

Operationally, this requires a significant enhancement of the firm’s data infrastructure. Execution management systems (EMS) and order management systems (OMS) must be tightly integrated with data warehouses and analytical platforms. The goal is to create a seamless flow of data that allows for both real-time monitoring and post-trade forensic analysis. This operational setup is the new foundation for demonstrating compliance.

The following steps outline a high-level operational playbook for adapting to the new best execution landscape:

1. Policy Redefinition ▴ Revise the firm’s best execution policy to reflect the shift from public reporting to internal evidence gathering. The policy should clearly define the factors considered for execution, the roles and responsibilities for oversight, and the methodology for monitoring and review.
2. Data Infrastructure Audit ▴ Conduct a thorough audit of the firm’s data capture and storage capabilities. Identify any gaps in the data required for robust TCA and venue analysis and implement the necessary system enhancements.
3. Analytical Model Development ▴ Develop or procure sophisticated TCA models that go beyond basic benchmarks. These models should be tailored to the firm’s specific trading strategies and asset class focus.
4. Governance Workflow Implementation ▴ Establish a formal governance process for the regular review of execution quality. This should involve a dedicated committee that reviews TCA reports, challenges execution decisions, and approves changes to the firm’s execution policy and routing logic.
5. Training and Education ▴ Ensure that all relevant personnel, from traders to compliance officers, are trained on the new best execution framework and their specific responsibilities within it.

Ultimately, the deprioritization of RTS 28 represents a maturation of the best execution regime. It moves the industry away from a superficial compliance exercise towards a more substantive and data-driven approach to fulfilling the fiduciary duty owed to clients. The firms that will thrive in this new environment are those that view best execution not as a regulatory burden, but as a core component of their operational and competitive strategy.

Reflection

Beyond the Mandate

The sunsetting of the RTS 28 reporting requirement is more than a simple reduction in administrative overhead. It acts as a catalyst, compelling a deeper introspection into the very nature of a firm’s operational philosophy. The removal of a prescriptive public benchmark creates a void that must be filled not with new reports, but with a more profound and intrinsic commitment to execution excellence. The question for every institution is no longer “What must we report?” but rather “What constitutes true fidelity to our clients’ interests, and how do we build a system that proves it without compromise?”

This evolution challenges firms to look beyond the immediate demands of compliance and to consider the architecture of their entire trading apparatus. It prompts a critical examination of the interplay between technology, data, and human expertise. The systems that once aggregated data for a static annual report must now be repurposed to provide dynamic, actionable intelligence. This intelligence is the new currency of best execution.

It is the foundation upon which a firm can build a defensible, data-driven narrative of its value proposition. The ultimate advantage lies not in meeting a regulatory minimum, but in designing an operational framework so robust and transparent that it becomes a strategic asset in its own right, fostering a level of client trust that no public report could ever achieve.