How Has the Removal of Rts 27 and 28 Reporting Changed Best Execution in the Eu?

Concept

The removal of Regulatory Technical Standards (RTS) 27 and 28 reporting obligations represents a fundamental redesign of the European Union’s market transparency architecture. These mandates were originally conceived as a public utility, designed to provide a standardized, data-driven foundation for assessing best execution. RTS 27 required execution venues to publish detailed quarterly reports on execution quality, covering metrics like price, cost, and speed.

Concurrently, RTS 28 obligated investment firms to annually disclose their top five execution venues for each class of financial instrument, alongside a summary of the execution quality achieved. The systemic goal was to empower investors and clients with comparable data, allowing them to scrutinize where their orders were being routed and the quality of the outcomes.

However, the practical implementation of this framework revealed significant structural flaws. Stakeholder feedback and regulatory reviews, including those by the European Securities and Markets Authority (ESMA), consistently highlighted that the reports were largely ineffective. The data within RTS 27 reports were often found to be overly complex, difficult to compare across venues due to inconsistencies in preparation, and of limited use for making meaningful judgments. For many market participants, the sheer volume and technical nature of the data required substantial IT and analytical resources to process, yielding little actionable insight.

The intended audience rarely engaged with the reports, which were often several months out of date by the time of publication. This operational friction and lack of utility led regulators to conclude that the system was not achieving its intended purpose of enhancing transparency in a useful way.

Consequently, the decision to remove these reporting requirements is not a retreat from the principle of best execution itself. On the contrary, ESMA and national competent authorities (NCAs) have emphatically reinforced that the underlying obligation for firms to achieve the best possible result for their clients remains firmly in place. The change signals a pivot in regulatory approach. It acknowledges that the previous top-down, one-size-fits-all reporting mechanism failed.

The system now moves toward a model where the evidentiary burden for demonstrating best execution shifts decisively inward, onto the investment firms themselves. This places a greater emphasis on the robustness of their internal policies, their proprietary data analysis capabilities, and their qualitative judgment in selecting and monitoring execution venues.

Strategy

The discontinuation of RTS 27 and 28 reporting necessitates a strategic recalibration for investment firms. The absence of a mandated, public reporting framework means that the responsibility for gathering, analyzing, and evidencing best execution now rests squarely on the internal structures of each firm. This shift transforms best execution from a compliance-driven reporting exercise into a strategic imperative centered on building a sophisticated and defensible internal analysis framework. Firms can no longer point to a standardized public report as a baseline; they must now construct their own evidentiary narrative.

The strategic focus moves from public data consumption to the generation of proprietary proof of execution quality.

The Ascendancy of Internal Governance

With the external check of RTS 28 reports gone, the role of internal oversight bodies, such as the Best Execution Committee, becomes paramount. These committees must evolve from reviewing standardized reports to actively shaping and scrutinizing a bespoke analytical process. Their strategic mandate now includes defining the metrics, methodologies, and data sources the firm will use to monitor execution quality effectively. This requires a deeper engagement with the firm’s trading activities and a more nuanced understanding of market microstructure.

The strategic questions for the committee have changed:

• Data Sourcing ▴ What internal and third-party data sources will we use to replicate and enhance the analytical capabilities once intended by RTS 27?
• Methodology Definition ▴ How will we define and measure execution quality across different asset classes and order types in a consistent and statistically valid manner?
• Qualitative Overlay ▴ How will we systematically assess and document qualitative factors for venue selection, such as counterparty risk, technological stability, and the potential for information leakage?
• Evidentiary Record ▴ What form will our internal “best execution file” take to provide a comprehensive and defensible record for regulatory scrutiny?

Transaction Cost Analysis as the New Bedrock

Transaction Cost Analysis (TCA) emerges as the central pillar of the new best execution strategy. While TCA is not a new concept, its role has been elevated from a supplementary tool to the primary quantitative method for satisfying regulatory obligations and internal performance goals. A modern TCA framework must go far beyond simple comparisons to a Volume-Weighted Average Price (VWAP) benchmark. It must provide a multi-dimensional view of execution, tailored to the specific context of each order.

The table below outlines a comparative framework for a modern TCA system, demonstrating the level of granularity required to assess execution quality effectively in the absence of RTS 27 data.

This level of analysis allows a firm to have a much more sophisticated dialogue with its brokers and venues. It enables a data-driven assessment of which execution channels are best suited for different order types and market conditions, forming a core component of the firm’s strategic decision-making process.

Execution

In the post-RTS 27/28 environment, executing a compliant and effective best execution policy is an exercise in deep operational diligence. The focus shifts from the production of reports for public consumption to the implementation of a robust, continuous, and internally-focused monitoring and governance system. This requires a granular approach to data, a structured qualitative assessment process, and a clear technological strategy.

A firm’s ability to demonstrate best execution is now a direct function of the quality of its internal operational framework.

The Operational Playbook for Diligence

A firm’s execution policy must be a living document, supported by a clear and repeatable set of operational procedures. The Best Execution Committee’s work becomes the engine of this process, driven by a cyclical flow of data analysis, qualitative review, and strategic adjustment.

1. Data Aggregation and Normalization ▴ The first step is to establish a reliable data pipeline. This involves capturing time-stamped order and execution data from the firm’s Order Management System (OMS) and enriching it with market data from a high-quality vendor. Data must be normalized to allow for accurate comparison across different venues and brokers.
2. Systematic TCA Reporting ▴ Automated TCA reports should be generated on at least a monthly basis and reviewed by the execution desk and compliance teams. These reports must be configured to flag outliers and exceptions automatically, such as orders with slippage beyond a predefined threshold or algorithms underperforming their benchmarks.
3. The Qualitative Review Cadence ▴ Qualitative factors must be reviewed systematically. This involves quarterly deep-dive reviews with key brokers and venues, focusing on their technology roadmap, risk management practices, and any changes in their market microstructure. The findings of these reviews must be formally documented.
4. The Annual Policy Review ▴ The firm’s overall best execution policy and venue selection must be formally reviewed and re-approved by the committee annually. This review must synthesize a full year’s worth of quantitative TCA data and qualitative assessments to justify the firm’s execution strategy for the upcoming year.

Quantitative Modeling and Data Analysis

The core of the execution framework is the quantitative analysis used to compare different execution outcomes. This requires a more sophisticated approach than simply looking at top-level metrics. Firms must analyze execution quality across various dimensions to build a complete picture.

The following table provides an example of a more detailed, factor-based analysis for assessing a specific broker’s algorithmic trading performance. This level of detail is essential for a meaningful dialogue and for evidencing that the firm is actively monitoring and optimizing its execution choices.

System Integration and Technological Architecture

Supporting this enhanced analytical framework requires a robust technological architecture. The firm’s Execution Management System (EMS) and Order Management System (OMS) are central to this. These systems must be configured to capture not just basic order details, but a rich set of contextual data, including:

• Precise Timestamps ▴ Millisecond or even microsecond-level timestamps for order placement, routing, and execution are essential for accurate slippage calculations.
• Parent and Child Order Linkage ▴ The system must maintain a clear link between a high-level investment decision (parent order) and the individual executions (child orders) used to implement it.
• Algorithm Parameters ▴ For every algorithmic order, the specific parameters used (e.g. target participation rate, aggression level, start/end times) must be logged to provide context for the TCA results.

Furthermore, these internal systems must have well-defined API endpoints to facilitate seamless integration with third-party TCA providers and market data vendors. This integration is critical for enriching internal data with the broader market context needed for meaningful analysis. The ability to systematically pull this data into a centralized analytics environment is what enables the entire best execution governance process to function efficiently and effectively.

Reflection

The Durability of Internal Scrutiny

The dismantling of the RTS 27 and 28 reporting regime clears away a flawed and cumbersome apparatus. It leaves in its place a foundational question for every institutional investment firm ▴ how robust is your internal information architecture? The regulatory mandate has shifted from a standardized output to an individualized, defensible process. This evolution demands a higher degree of self-reliance and a deeper investment in the systems, both human and technological, that govern the execution of client orders.

The quality of a firm’s best execution framework is now a direct reflection of its institutional character ▴ its commitment to analytical rigor, its technological sophistication, and the diligence of its internal oversight. The data and analysis presented here are components of a larger system of intelligence. Integrating these components into a coherent, evidence-based process is the defining challenge and opportunity in the current European market structure. The ultimate advantage lies with those who can build a superior internal system for navigating this new landscape of accountability.