How Has the Removal of RTS 28 Reports Affected Best Execution Oversight for LIS Trades? ▴ Question

Abstract interconnected modules with glowing turquoise cores represent an Institutional Grade RFQ system for Digital Asset Derivatives. Each module signifies a Liquidity Pool or Price Discovery node, facilitating High-Fidelity Execution and Atomic Settlement within a Prime RFQ Intelligence Layer, optimizing Capital Efficiency

Abstract geometric structure with sharp angles and translucent planes, symbolizing institutional digital asset derivatives market microstructure. The central point signifies a core RFQ protocol engine, enabling precise price discovery and liquidity aggregation for multi-leg options strategies, crucial for high-fidelity execution and capital efficiency

Concept

The removal of RTS 28 reports represents a fundamental shift in the philosophy of best execution oversight. It signals a move away from a compliance-centric, report-driven process towards a more dynamic and evidence-based framework. For Large in Scale (LIS) trades, this transition is particularly significant.

The unique characteristics of LIS trades, which often involve bespoke negotiation and execution strategies to minimize market impact, were never fully captured by the standardized and aggregated data in RTS 28 reports. The disappearance of these reports, therefore, necessitates a more sophisticated and tailored approach to demonstrating best execution for these high-stakes transactions.

The original intent of RTS 28 was to provide transparency into the execution practices of investment firms, allowing clients to assess the quality of the execution they were receiving. These reports required firms to summarize and make public the top five execution venues used for each class of financial instrument, along with information on the quality of execution obtained. However, the utility of these reports was widely questioned.

The aggregated nature of the data often obscured the nuances of individual execution decisions, particularly for LIS trades where the choice of venue and counterparty is highly specific and strategic. The reports were often seen as a “tick-the-box” exercise, with little practical value for clients or for firms’ internal oversight processes.

The core obligation to achieve the best possible result for clients remains, even as the reporting requirements evolve.

LIS trades are, by their nature, a special case. The MiFID II framework acknowledges this by providing for pre-trade transparency waivers for LIS orders, recognizing that broadcasting large orders to the market can lead to significant price dislocation and harm to the client. This means that LIS trades are often executed off-book, through mechanisms like request for quote (RFQ) systems or over-the-counter (OTC) negotiation. The standardized reporting format of RTS 28 was ill-suited to capturing the qualitative factors that are critical to best execution for these trades, such as the skill of the trader, the choice of counterparties, and the management of information leakage.

The demise of RTS 28, therefore, presents an opportunity for firms to develop more meaningful and effective best execution oversight frameworks for LIS trades. This requires a move beyond simple compliance and towards a culture of continuous improvement, where execution quality is actively monitored, analyzed, and optimized. The focus must now be on building a robust internal governance structure that can effectively scrutinize LIS execution strategies and demonstrate, with clear evidence, that the firm is consistently acting in the best interests of its clients.

A dark blue, precision-engineered blade-like instrument, representing a digital asset derivative or multi-leg spread, rests on a light foundational block, symbolizing a private quotation or block trade. This structure intersects robust teal market infrastructure rails, indicating RFQ protocol execution within a Prime RFQ for high-fidelity execution and liquidity aggregation in institutional trading

Abstract, sleek forms represent an institutional-grade Prime RFQ for digital asset derivatives. Interlocking elements denote RFQ protocol optimization and price discovery across dark pools

Strategy

In a post-RTS 28 environment, the strategy for best execution oversight for LIS trades must be proactive, data-driven, and qualitative. It is a shift from a retrospective reporting exercise to a continuous, integrated process of analysis and improvement. The central pillar of this new strategy is a sophisticated and tailored Transaction Cost Analysis (TCA) framework, supplemented by a rigorous qualitative assessment of the execution process.

Interconnected translucent rings with glowing internal mechanisms symbolize an RFQ protocol engine. This Principal's Operational Framework ensures High-Fidelity Execution and precise Price Discovery for Institutional Digital Asset Derivatives, optimizing Market Microstructure and Capital Efficiency via Atomic Settlement

The Centrality of Transaction Cost Analysis

TCA is the primary tool for quantitatively assessing the quality of execution. For LIS trades, a “one-size-fits-all” approach to TCA is insufficient. The analysis must be tailored to the specific characteristics of the trade, including the instrument, the market conditions, and the client’s objectives. The goal of TCA for LIS trades is to provide a detailed, multi-faceted view of execution performance, moving beyond simple price-based metrics to capture the full range of costs and risks associated with the trade.

A robust TCA framework for LIS trades should incorporate a variety of benchmarks to provide a comprehensive picture of execution quality. These benchmarks can be used to assess the performance of different execution strategies, venues, and traders, and to identify areas for improvement. The table below outlines some of the key TCA metrics for LIS trades.

Key TCA Metrics for LIS Trades
Metric	Description	Application to LIS Trades
Implementation Shortfall	Measures the total cost of execution relative to the price at the time the decision to trade was made.	Provides a holistic view of execution costs, including market impact, timing risk, and opportunity cost.
VWAP (Volume-Weighted Average Price)	Compares the execution price to the average price of the instrument over the trading day, weighted by volume.	Useful for assessing performance against the market, but can be misleading for LIS trades that are executed over a short period or in illiquid markets.
Market Impact	Measures the extent to which the trade moved the market price.	A critical metric for LIS trades, as minimizing market impact is often a primary objective.
Reversion	Measures the tendency of the price to move back in the opposite direction after the trade is completed.	Can indicate that the trade had a significant temporary market impact.

A dark central hub with three reflective, translucent blades extending. This represents a Principal's operational framework for digital asset derivatives, processing aggregated liquidity and multi-leg spread inquiries

Qualitative Oversight and Best Practices

While TCA provides the quantitative foundation for best execution oversight, it must be complemented by a rigorous qualitative assessment of the execution process. This involves a detailed review of the decisions made by the trader, the choice of execution venue, and the overall execution strategy. For LIS trades, where discretion and judgment play a significant role, this qualitative oversight is particularly important.

A culture of continuous improvement, supported by robust data and qualitative review, is the new standard for best execution.

The following list outlines some best practices for demonstrating best execution for LIS trades in the absence of RTS 28 reports:

Pre-trade analysis ▴ Before executing a LIS trade, the trader should conduct a thorough analysis of the market conditions, liquidity, and potential execution strategies. This analysis should be documented and reviewed.
Venue selection ▴ The choice of execution venue should be justified based on a range of factors, including liquidity, cost, and the likelihood of achieving a good outcome. The firm should have a clear policy for venue selection and should regularly review the performance of the venues it uses.
Order handling ▴ The trader should have a clear rationale for the order type and execution algorithm used. The firm should have policies in place to prevent information leakage and to ensure that LIS orders are handled in a way that minimizes market impact.
Post-trade review ▴ Every LIS trade should be subject to a detailed post-trade review, which includes both a quantitative analysis of the execution quality (using TCA) and a qualitative assessment of the execution process.

A textured spherical digital asset, resembling a lunar body with a central glowing aperture, is bisected by two intersecting, planar liquidity streams. This depicts institutional RFQ protocol, optimizing block trade execution, price discovery, and multi-leg options strategies with high-fidelity execution within a Prime RFQ

Execution

The execution of a robust best execution framework for LIS trades in a post-RTS 28 world requires a combination of sophisticated technology, rigorous processes, and strong governance. It is an operational discipline that must be embedded in the firm’s culture and supported by a commitment to continuous improvement. This section provides a detailed look at the practical steps involved in building and maintaining such a framework.

A robust circular Prime RFQ component with horizontal data channels, radiating a turquoise glow signifying price discovery. This institutional-grade RFQ system facilitates high-fidelity execution for digital asset derivatives, optimizing market microstructure and capital efficiency

A Sample Best Execution Policy for LIS Trades

A clear and comprehensive best execution policy is the cornerstone of any effective oversight framework. The policy should set out the firm’s approach to achieving best execution for LIS trades, including the specific procedures to be followed at each stage of the trade lifecycle. The table below provides an example of what such a policy might look like.

Sample Best Execution Policy for LIS Trades
Stage	Procedure	Documentation
Pre-Trade	Conduct a thorough analysis of market conditions, liquidity, and potential execution strategies. Identify a range of suitable execution venues and counterparties. Document the rationale for the chosen strategy.	Pre-trade analysis report, including market data, liquidity analysis, and a summary of the chosen strategy.
At-Trade	Monitor the execution of the trade in real-time, making adjustments as necessary to respond to changing market conditions. Document any deviations from the pre-trade plan.	Trader notes, order logs, and records of any changes to the execution strategy.
Post-Trade	Conduct a detailed post-trade review, including a full TCA analysis and a qualitative assessment of the execution process. Identify any lessons learned and feed them back into the pre-trade process.	Post-trade review report, including TCA results, a qualitative assessment, and any recommendations for improvement.

Metallic, reflective components depict high-fidelity execution within market microstructure. A central circular element symbolizes an institutional digital asset derivative, like a Bitcoin option, processed via RFQ protocol

Technology and Data Requirements

Effective best execution oversight for LIS trades is impossible without the right technology and data. Firms need to invest in sophisticated TCA systems that can provide a detailed, multi-faceted view of execution performance. These systems should be able to handle the large and complex datasets associated with LIS trades and should provide a range of analytical tools to help firms identify areas for improvement.

In addition to TCA systems, firms also need access to high-quality market data. This includes both real-time data for at-trade monitoring and historical data for pre-trade and post-trade analysis. The data should be clean, accurate, and comprehensive, covering all relevant execution venues and instruments.

A central hub, pierced by a precise vector, and an angular blade abstractly represent institutional digital asset derivatives trading. This embodies a Principal's operational framework for high-fidelity RFQ protocol execution, optimizing capital efficiency and multi-leg spreads within a Prime RFQ

Governance and Continuous Improvement

Strong governance is essential for ensuring that the best execution framework is effective and that the firm is consistently acting in the best interests of its clients. The firm should have a dedicated best execution committee, which is responsible for overseeing the framework and for reviewing the results of the post-trade analysis. The committee should be composed of senior staff from across the firm, including trading, compliance, and risk.

The ultimate goal is a virtuous circle of continuous improvement, where data and analysis are used to refine execution strategies and deliver better outcomes for clients.

The firm should also have a process in place for regularly reviewing and updating the best execution framework. This should include a review of the TCA methodology, the choice of benchmarks, and the overall effectiveness of the framework. The goal is to create a culture of continuous improvement, where the firm is constantly seeking to enhance its execution capabilities and to deliver better outcomes for its clients.

Regular Audits ▴ The best execution framework should be subject to regular internal and external audits to ensure that it is operating effectively and that it complies with all relevant regulations.
Training and Development ▴ Traders and other relevant staff should receive regular training on the firm’s best execution policies and procedures. This will help to ensure that they have the knowledge and skills they need to achieve the best possible results for clients.
Client Communication ▴ While RTS 28 reports may be gone, the need for transparency with clients remains. Firms should be prepared to provide clients with detailed information on their execution practices and to discuss the results of their TCA analysis.

Abstract institutional-grade Crypto Derivatives OS. Metallic trusses depict market microstructure

References

European Securities and Markets Authority. (2024, February 13). ESMA clarifies the application of MiFID II best execution reporting. ESMA.
Financial Conduct Authority. (2021, December 1). Changes to UK MiFID’s conduct and organisational requirements. FCA.
The TRADE. (2024, February 13). ESMA officially scraps ‘hardly read’ RTS 28 best execution reports. The TRADE.
Global Trading. (2024, February 14). RTS 28 reports dropped as ESMA deprioritises enforcement. Global Trading.
DLA Piper. (2024, February 20). ESMA publishes statement on reporting requirements under RTS 28 of MiFID II. DLA Piper.

A sleek, multi-segmented sphere embodies a Principal's operational framework for institutional digital asset derivatives. Its transparent 'intelligence layer' signifies high-fidelity execution and price discovery via RFQ protocols

Reflection

The end of the RTS 28 era is an invitation to look beyond the narrow confines of regulatory reporting and to focus on what truly matters ▴ achieving the best possible outcomes for clients. For firms that trade in LIS, this is an opportunity to build a more intelligent and effective execution framework, one that is tailored to the unique challenges and opportunities of the block trading landscape. The question is no longer “How do we comply?” but “How do we excel?”. The answer lies in a commitment to continuous improvement, a deep understanding of the markets, and a relentless focus on the needs of the client.