Review of the MiFID II framework on best execution reports by investment firms
Final Report
Review of the MiFID II framework on best execution
reports by investment firms
16 May 2022 |
ESMA35-43-3088
16 May 2022 ESMA35-43-3088
ESMA •
201-203 rue de Bercy • CS 80910 • 75589 Paris Cedex 12 • France • Tel.
+33 (0) 1 58 36 43 21 • www. esma. europa. eu
2
Table
of Contents
1 Executive Summary. . . . . . . . . . . . . . .
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2 Overview. . . . . . .
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3 Annexes. . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
3. 1 Annex I: Feedback from stakeholders. . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . 13
3. 2 Annex II:
Outlook on potential costs and benefits. . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17
3
1 Executive Summary
Reasons for
publication
MiFID II requires execution venues and investment
firms to publish periodic data on the quality of execution and has
required ESMA to adopt technical standards in this area.
Relevant technical standards are known as RTS 27 (applicable
to execution venues) and RTS 28 (applicable to investment firms).
In the application of the MiFID II framework, ESMA has become
aware, also through contacts with stakeholders, of potential issues
related to these best execution reporting requirements. The issues
are primarily related to reporting by venues and to a lesser extent
to firms’ reports.
Additionally, Directive (EU) No. 2021/338
(“MiFID II Amending Directive”) suspends the application of the RTS
27 reporting requirements for two years and requires the European
Commission (“Commission”) to comprehensively review the adequacy of
the reporting requirements under Articles 27(3) and (6) of Directive
(EU) No. 2014/65 (“MiFID II”) and submit a report to the European
Parliament and the Council.
In this light, and in the context
of ESMA’s mandate in accordance with Articles 1(5), 16a(1) and 29(2)
of the ESMA founding regulation (Regulation (EU) No. 1095/2010), on 24
September 2021 ESMA published a Consultation Paper to seek
stakeholders’ technical input on ESMA’s proposals for possible
improvements to the regime which could be adopted in the future to
ensure an effective and consistent level of regulation and supervision
and enhance investor protection in this area. The consultation period
closed on 23 December 2021. ESMA received 51 responses, 9 of which
were confidential. The answers received are available on ESMA’s
website unless respondents requested otherwise.
During the
period in which ESMA’s consultation was open, the Commission published
its legislative proposals for the review of the MiFID II/MiFIR
framework. Those proposals include to delete both Article 27(3) (i.
e. , the Level 1 basis for the reporting obligation for venues) and
Article 27(10)(a) MiFID II (i. e. , the empowerment for ESMA to
develop draft technical standards). In other words, the Commission’s
proposed deletions aim at abolishing reporting requirements for
venues (RTS 27). In this light, ESMA decided to put on hold any on-
going work related to RTS 27 and, consistently, this Final Report does
not deal with this topic but only with best execution reporting
requirements for investment firms. ESMA might reconsider this
decision, should the Commission’s proposal be amended as a result of
negotiations at legislative level (so called Level 1) on the MiFID
II/MiFIR Review.
ESMA sought the advice of the ESMA Securities
and Markets Stakeholder Group (SMSG) established under Regulation
(EU) No 1095/2010.
Contents
Section 2 provides an
overview of the Final Report and, inter alia, sets out the policy
rationale for best execution reporting by investment firms, also
against the backdrop of a possible
4
future
consolidated tape. The main component of this section are proposals
through which best execution reports by investment firms could be
improved. In particular, those suggestions aim at (i) enhancing the
RTS 28 reports’ quality of information (inter alia, by proposing to
delete a specific reporting obligation for firms on the features of
executed orders which has not proven effective under the current
reporting framework); and at (ii) facilitating the use of RTS 28
reports (e. g. via the suggestion that firms are required to publish
the reports’ quantitative information in the simple CSV format to
facilitate end-users’ access and comparison of this data). It should
also be mentioned that some proposals in this paper concern potential
changes to the legislation (Article 27(6) of MiFID II - Level 1).
As a consequence, subsequent potential changes to RTS 28 (so
called Level 2) could only be considered against any future changes
of the Level 1.
Section 3 consists of two Annexes. Annex I
contains the feedback statement and Annex II includes an outlook on
potential costs and benefits.
Next Steps
The present
Final Report, presenting ESMA’s views, proposals and opinions on
potential improvements of the regime, will be shared with the
European Commission to contribute to the Commission’s analysis on the
adequacy of the MiFID II best execution reporting obligations and to
any subsequent determinations on the retention of the regime and how
it could possibly change.
5
2 Overview
Background
Legal background
1. Article 27 of
Directive 2014/65/EU (“MIFID II”) sets out best execution requirements
which aim at ensuring that firms take all sufficient steps to obtain,
when executing client orders, the ‘best possible result’ for their
clients. The best execution framework also includes reporting
obligations for execution venues (“venues”) (Article 27(3) of MiFID
II) and for investment firms (“firms”) (Article 27(6) of MiFID II).
2. Article 27(10)(a) of MiFID II requires ESMA to develop
draft regulatory standards to determine the specific content, the
format and the periodicity of data relating to the quality of
execution to be published in accordance with Article 27(3), taking
into account the type of execution venue and the type of financial
instrument concerned. Additionally, Article 27(10)(b) of MiFID II
requires ESMA to develop draft regulatory technical standards to
determine the content and the format of information to be published by
investment firms in accordance with Article 27(6). On the basis of
these requirements, ESMA has adopted the relevant technical standards
which are commonly known as RTS 271 and RTS 282 and lay down the
reporting requirements to foster achieving the aforementioned best
execution objectives. In particular:
• under RTS 27 venues3
have to provide quarterly comprehensive sets of relevant data to
allow investment firms, professional investors and the public to
assess and understand the quality of execution achieved on the venue;
and
• under RTS 28 firms must publish annual reports to
enable the public and investors to
evaluate the quality of a
firm’s execution practices.
3. However, in the course of the
application of MiFID II framework, issues with the best execution
reporting requirements have been identified, for example in media
reports and in ESMA’s exchange with stakeholders. The issues are
primarily related to RTS 27 (e. g.
relating to venues’
publication of lengthy reports and market participants’ limited use of
this information for execution quality assessments) and to lesser
extent to RTS 28 (e. g. limited use of reported information).
4. On 24 July 2020, the Commission adopted the Capital Markets
Recovery Package (“Recovery Package”) to support the recovery from
the severe economic shock caused by the COVID-19 pandemic. The
Recovery Package contains proposals for amendments to several
regulatory frameworks in financial services, including the MiFID II
rules. 4 Those
1
Commission
Delegated
Regulation
2017/575/EU
(“RTS
27”):
https://eur-lex. europa. eu/legal-
content/EN/TXT/PDF/?uri=CELEX:32017R0575&from;=EN
2
Delegated
Regulation
2017/576/EU
Commission
(“RTS
28”):
https://eur-
lex. europa. eu/legal-
content/EN/TXT/PDF/?uri=CELEX:32017R0576&from;=EN 3 Execution
venues include trading venues, systematic internalisers, market makers
and other liquidity providers (Article 1 RTS 27, in line with the
relevant best execution requirements in the MiFID II delegated
regulation).
4 Apart from the proposed changes to MiFID II,
the EC’s Capital Market Recovery Package also encompasses proposals
of
6
suggested amendments focus on changes in specific
areas of MiFID II, such as best execution.
5. On 26 February
2021, Directive 2021/338/EU (“MiFID II Amending Directive”) was
published and entered into force on the day following that of
its publication. 5
6. Recital 9 of the MiFID II Amending
Directive sets out, inter alia that RTS 27 reports contain large
amounts of detailed data and do not enable investors and other users
to make meaningful comparisons regarding venues’ execution quality.
With regards to the MiFID II best execution rules laid out in RTS 27
and RTS 28, the MiFID II Amending Directive encompasses the following
changes:
a) The periodic reporting requirement required by
Article 27(3) of MiFID II (which is the basis for RTS 27) shall not
apply for two years following the entry into force of the Amending
Directive (Article 1(6) of the MiFID II Amending Directive), and;
b) the Commission shall comprehensively review the adequacy of
the reporting requirements of Articles 27(3) and (6) of MiFID II and
submit a report to the European Parliament and the Council (Articles
1(6) and (6a) of the MiFID II Amending Directive).
7. On 25
November 2021, the Commission published its legislative proposals for
the review of the MiFID II/MiFIR framework. 6 Those proposals include
a consolidated tape (CT) to disclose post-trade information regarding
all financial instruments. According to the Commission the CT
information can be used for proving best execution and consequently,
the Commission also suggests deleting both Article 27(3) (reporting
obligation for venues) and Article 27(10)(a) MiFID II (the
empowerment for ESMA to develop draft technical standards). 7 In
other words, those proposed deletions aim at abolishing reporting
requirements for venues (RTS 27).
8. As a result of this
Commission’s legislative proposal, which is currently negotiated in
the context of the ordinary legislative procedure and which has a
potential direct impact on RTS 27, the present Final report will only
deal with reporting obligations for firms (RTS 28).
Policy
background
9. The Directive on Markets in Financial
Instruments (“MiFID I”) did not oblige investment firms (“firms”) to
disclose any information about the execution quality actually achieved
in their execution of client orders. Consequently, under MiFID I,
firms’ information provided
amendments to the Prospectus
Regulation and the Securitisation Regulation, see also: https://ec.
europa. eu/info/publications/200722-proposal-capital-markets-
recovery_en 5
Directive
2021/338/EU
(“MiFID
II
Amending
Directive”):
https://eur-lex. europa. eu/legal-
instruments:
https://eur-lex. europa. eu/legal-
content/EN/TXT/PDF/?uri=CELEX:52021PC0726&from;=EN, and
conte
nt/EN/TXT/PDF/?uri=CELEX:32021L0338&qid;=1615898803540&from;=en 6 See
the Proposal for a Directive of the European Parliament and of the
Council amending Directive 2014/65/EU on markets in financial the
Proposal for a Regulation of the European Parliament and of the
Council amending Regulation (EU) No 600/2014 as regards enhancing
market data transparency, removing obstacles to the emergence of a
consolidated tape, optimising the trading obligations and prohibiting
client orders: https://eur-lex. europa. eu/legal-
content/EN/TXT/PDF/?uri=CELEX:52021PC0727&from;=EN 7 See Article 1(4)
of the European Commission’s proposal for a Directive of the European
Parliament and of the Council amending Directive 2014/65/EU on
markets in financial instruments.
receiving payments
forwarding
for
7
to clients relating
to their execution policy had often been very generic. This
information did not enable clients to understand how firms executed
orders and how they ensured that they executed orders on terms most
favourable to their clients.
10. In order to enhance investor
protection, the MiFID II framework sets out the obligation for firms
to publish annual reports on the quality of execution. This MiFID II
requirement has been implemented through RTS 28. This requirement
intends to address the lack of publicly available information on
execution quality under MiFID I, to enable the public and investors
to evaluate firms’ efforts to obtain best execution in executing
client orders (for example, by allowing to compare a firm’s actual
execution practices with its execution policy). Thus, this type of
reporting allows informing clients on the execution venues frequently
selected by firms and on firms’ efforts to obtain execution quality.
Accordingly, RTS 28 reports also aim to support investors and the
public in choosing the most suitable firm for the execution of their
orders and in achieving better execution results.
11. While
market participants and national competent authorities (NCAs) have
observed shortcomings in the current RTS 28 reporting regime and a
low use of this information for assessing the execution quality
obtained by firms, the rationale indicated above continues to apply.
Indeed, in ESMA’s view, a requirement for firms to periodically report
to the public on how they achieved best execution for their clients
over a given period is an important pillar of a well-functioning best
execution regime.
12. Moreover, the European Commission’s
(“Commission”), recent proposal, as part of the MiFID II/MiFIR
Review, to establish a CT for all financial instruments has the
potential to further improve the information on firms’ execution
quality included in RTS 28 reports.
According to the
Commission, the post-trade information regarding all transactions in
financial instruments to be provided by the future CT can be used by
firms as a means to assist in supporting the proof of best execution
(in relation to prices). In ESMA’s view,
firms’ use of CT data
to obtain best execution can be included in RTS 28 reports (provided
the co-legislators agree upon establishing a CT).
13. As firms
are required to achieve best execution in the execution of their
client orders, they must disclose information to their clients about
the prices at which they bought and sold financial instruments in
comparison to prices and volumes provided on different venues at the
moment when the trade was executed. However, currently the data about
the available liquidity on different venues within the Single Market
is often fragmented and costly to acquire, which hampers firms’
capacity to choose the most advantageous venue to execute their
client orders. In order to address this shortcoming, the future CT
aims at providing standardised information on prices and liquidity
available in all EU trading markets to enable firms to choose the
best venue to execute their client orders. Since RTS 28 reports
disclose cost-free information about firms’ obtained execution
quality, those reports can potentially become an important channel to
disclose the results of firms’ execution practices (based on the
future CT data) to clients. Thereby, RTS 28 reports can enable end-
users to account for firms’ (potentially) improved execution practices
(resulting from the CT data) when choosing the most suitable firm for
the execution of their orders.
8
Public consultation
14. On 24 September 2021, ESMA published a Consultation Paper
(CP)8 which identified reasons for the shortcomings of the RTS 28
(as well as RTS 27) reporting framework and proposed possible
improvements to the regime which could be adopted in the future to
ensure an effective and a consistent level of regulation and
supervision and enhance investor protection in this area. The
consultation aimed at receiving technical input from market
participants on how a reviewed best execution reporting regime could
look like and closed on 23 December 2021.
15. ESMA received
51 responses, 9 of which on a confidential basis. The answers received
are available on ESMA’s website unless respondents requested
otherwise. 9
Analysis following the consultation
RTS
28
16. A majority of respondents pointed to the low use of
the current RTS 28 reports by market participants. This stakeholder
feedback is in in line with ESMA’s analysis conducted in the follow-
up of the implementation of the MiFID II framework and which is also
included in the CP (for a summary of stakeholders’ comments to ESMA’s
proposals for a possible improvement of the RTS 28 reporting
framework and for ESMA’s respective responses see Annex I).
17. ESMA acknowledges the comments received and agrees that
there is room for improvement in the current RTS 28 reporting
framework and seems currently to be only used to a limited extent by
market participants (as also set out in the analysis chapter of the
CP on the Review of the MiFID II framework on best execution reports).
However, ESMA also believes that RTS 28 reporting framework could be
improved, so that RTS 28 reporting can help to better inform
investors in their choice of a firm for their order execution.
Indeed, ESMA views a periodic reporting requirement for firms on how
they achieved best execution as an important pillar of a well-
functioning best execution framework that should be retained.
Required legislative amendment for ESMA’s proposed RTS 28
changes to come into effect
18. ESMA highlights that a change
of the scope of Article 27(6) of MiFID II would be needed
to
enable improvements to the RTS 28 reporting regime.
19. In
particular this change should aim at clarifying that reporting
requirements also apply to firms that provide RTO services and to
portfolio managers that transmit their decisions to deal to other
firms for execution. Moreover, following the amendment of Article
27(6) MiFID, necessary adaptations of the MiFID II Delegated
Regulation 2017/565 (Article 65) would be needed to avoid legal
unclarity.
8 ESMA35-43-2836, https://www. esma. europa.
eu/sites/default/files/library/esma35-43-2836_cp_-
_best_execution_reports. pdf 9 ESMA consultation on the review of the
MiFID II framework on best execution reports: https://www. esma.
europa. eu/press- news/consultations/consultation-review-mifid-ii-
framework-best-execution-reports
9
ESMA’s approach
taken in the elaboration of proposals for the RTS 28 reporting regime
20. ESMA emphasises that, pending the Commission’s assessment
of the framework in this area, ESMA’s work has not aimed at producing
formal proposals for a new RTS 28 at this stage. Instead, ESMA has
developed suggestions for possible improvements of the reporting
regime in the future, in a way that may assist the Commission, on the
basis of these concrete proposals, to deliver its Report on the
adequacy of reporting requirements under Article 27(6) of MiFID II
required under the above mentioned Directive 2021/338/EU.
21.
Accordingly, ESMA’s work has focused on assessing ways to:
(i)
enhance the RTS 28 reports’ quality of
information and
(ii)
facilitate their use,
particularly via the following proposals (in comparison to the
current RTS 28 framework).
22. With regards to enhancing the
quality of information contained in RTS 28 reports the
following proposals should be mentioned:
• The
proposal to delete the obligation to report, as part of the list of
top five venues used by a firm, the percentage of the executed orders
that were passive and aggressive orders, as this information provided
only little added value in revealing firms’ execution quality.
• The proposal to require firms to explicitly confirm in their
summaries of execution quality, if they do not report on the required
parameters. Additionally, it is proposed to require firms to briefly
explain why they did not provide any information about the respective
parameter of execution quality 10.
23. With a view to make RTS
28 reports more user friendly, the following potential changes
should be mentioned:
• The requirement to publish the
quantitative information of RTS 28 reports in the CSV format in order
to facilitate end-users’ access and comparison of this data (e. g.
enabling to analyse the data of the top five lists of several firms
per class of financial instruments, via everyday life spreadsheet
software).
• The clarification of the reporting obligations
both for (i) firms executing client orders and (ii) for firms
providing the services of reception and transmission (“RTO”). So, ESMA
proposes to require firms to disclose, for example, separate top five
tables in terms of
10 Under the current RTS 28 regime, NCAs
have observed some cases, in which firms did not provide any
information in their RTS 28 report’s summary of execution quality on
certain parameters. For example, if a firm did not have any close
links and common ownerships to execution venues they use for client
order execution, they did not report on this required item. From a
policy perspective, the lack of certain information complicates the
understanding of the respective RTS 28 reports and affects their
quality. Consequently, the abovementioned proposal aims at ensuring
that if firms that do not report on a parameter of execution qualify,
they must briefly explain why they did not provide this information,
to ensure the report’s comprehensiveness and faciliate comparison of
those documents.
10
trading volumes for executed orders
or decisions to deal as well as for orders or decisions to deal which
those firms transmitted to third party entities for execution.
24. In light of certain observed shortcomings in the
publication of RTS 28 reports 11 and to enable end-users to benefit
from the aforementioned proposals to enhance quality and user-
friendliness of such reports, ESMA suggests specifying the
requirements for the publication of such reports (which is not the
case for the current respective RTS 28 provisions). ESMA proposes to
require firms to publish RTS 28 reports on a website in an easily
identifiable location without access limitations or other
restrictions. Those reports should also be published on a standalone
basis and should remain freely accessible for a minimum period of two
years from the initial date of publication. Firms that do not have any
website, should inform their clients that they provide them with RTS
28 reports upon request and free of charge. RTS 28 reports should
remain accessible on request, for a minimum period of two years from
the initial date of issuance.
25. The CP also mentioned the
need to require disclosure of information on received payments for
order flow (PFOF) in the summary of the firms’ obtained execution
quality (i. e. , to publish the aggregated amount of any PFOF
received, per venue of the top five list, and a breakdown of the
average amount of received PFOF per financial instrument) in order to
assist end-users in the choice of the most suitable firm for their
order execution. ESMA notes that, at this stage, this proposal would
no longer be relevant in light of the Commission’s legislative
proposal to ban PFOF, pending discussions in the context of the
ordinary legislative procedure (Article 1(26) of the Commission
proposal for a regulation amending Regulation (EU) No 600/2014,
mentioned above). Should the result of these discussions be different
from the Commission’s legislative proposal, ESMA will reassess the
relevance of its aforementioned proposal in order to possibly require
firms to disclose information on received PFOF, in the context of any
potential future work related to the best execution reporting
requirements.
Role of RTS 28 reporting in light of the future
CT
26. During the consultation for this FR, the Commission
has published its proposals for the Review of MiFID II/MiFIR which
include the suggestion to establish a CT, expected to provide post-
trade information regarding transactions in financial instruments. In
line with its position taken in the CP as to the need to take into
account any future legislation related to a CT, ESMA is of the
opinion that the data disclosed by the (proposed) CT could improve
the information of RTS 28 reports about firms’ obtained execution
quality, to the benefit of investors (see also paragraph 13 of this
Report).
27. More specifically, ESMA also believes that
further information about firms’ execution quality, based on their
use of CT data, could be disclosed via RTS 28 reports. Such
disclosure could encompass, inter alia, to what extent the firm
(issuing the report) has obtained a better price than the “reference
price” at the time of order execution (published by the CT) in the
execution of client orders of a certain category of financial
instruments
11 For observations related to certain firms’
publication practices which hamper the access to RTS 28 reports see
paragraphs 17, 19 and 20 in the ESMA Consultation Paper on the Review
of the MiFID II framework on best execution reports.
11
(e. g. shares of the highest tick size liquidity
band). 12 This may help investors to make a better-informed choice of
the firm to execute their orders and to achieve better investment
results. Hence, to provide for uniform best execution analyses, it
should be considered if the use of the CT reference price should be
made mandatory in the best execution analysis of RTS 28.
28.
Additionally, ESMA is of the opinion that consumer testing of the
presentation of key RTS 28 information that complement possible
future technical amendments of this reporting framework (e. g.
related to the use of CT data), can further enhance market
participants’ use of such (potentially) reviewed RTS 28 reports. To
this end, ESMA proposes that such potential consumer testing includes
approaches to facilitate the understanding of the disclosed RTS 28
information by consumers, for example, by referring to graphical
elements, disclosure by layers of information and possible insights
gained from behavioural economics to foster investor protection.
Further content
29. A summary of stakeholders’
comments to ESMA’s proposals for a possible improvement of the RTS 28
reporting framework and of ESMA’s respective responses are included in
Annex I of this FR.
30. Additionally, an outlook on potential
costs and benefits of the proposed possible
improvements for
RTS 28 is included in Annex II.
Next steps
31. ESMA
will send this Final Report to the European Commission. Pending the
Commission’s reports required by Directive 2021/338, this Final
Report will not lead to any immediate change of the existing RTS 28
which currently regulates best execution reporting by investment
firms.
32. Therefore, this Final Report only aims at providing
initial support to the Commission in its assessment of the adequacy
of the best execution reporting obligation for investment firms, and
any subsequent technical work to shape a well-functioning reporting
regime.
12 Such possible additional price-related information
disclosure in RTS 28 reports would be without prejudice to Article
27(1) of MiFID II pursuant to which firms are required to achieve the
‘best possible result’ for their clients when executing client orders,
accounting not only for price information, but also for other factors,
such as costs, speed and likelihood of execution.
12
3
Annexes
3. 1 Annex I: Feedback from stakeholders
RTS
28
Stakeholders’ general views on ESMA’s proposals for a
possible review of RTS 28
33. A majority of respondents noted
the low use of the current RTS 28 reports by market participants.
However, in particular, on how to address the current RTS 28 reporting
regime in a (future) review, diverging comments were raised:
• Some respondents, including one consumer association,
support ESMA’s proposals for amending certain reporting requirements
for firms on execution quality under RTS 28. Some of those
respondents noted that ESMA’s suggestions can help investors to make
better informed investment decisions, for example, by facilitating the
comparison of execution quality between firms. Additionally, a few
respondents suggested to (i) completely restructure the RTS 28
reporting obligations to provide a document which focuses on
disclosing, inter alia, conflicts of interest (including information
of trading with affiliates), (ii) to report in the top five list of
firms the counterparty where the trade is actually executed to better
inform about firms’ chosen trading partners and the concentration of
order execution flows, or (iii) to organise the top five list by
undertaken services instead of the (current) disclosure of investment
firm entities.
•
In contrast, some respondents do not
endorse ESMA’s proposals for amending firms’ RTS 28 reporting
obligations and propose to delete the RTS 28 reporting requirement.
Moreover, in the view of some of those respondents, the added
value of the information disclosed via the RTS 28 reports does not
justify the resources deployed for their production. Some of those
respondents also noted that ESMA’s proposals for amendments to the
RTS 28 reporting requirements may not significantly improve the
quality of the reports, as some suggestions (e. g. the disclosure of
RTS 28 data in machine-readable format) will require additional
investments by firms.
• A few other respondents focused on
noting the low use of the current RTS 28 reports without providing
specific views on how the current RTS 28 framework should be
addressed in a future review.
34. ESMA acknowledges the
comments received and agrees that there is room for improvement of
the current RTS 28 reporting framework and that it is only used to a
limited extent by market participants (as also set out in the
analysis chapter of the CP on the Review of the MiFID II framework on
best execution reports). However, ESMA also believes that the current
reporting regime can be improved so RTS 28 reporting can help to
better inform investors in their choice of a firm for their order
execution. Indeed, ESMA views a periodic reporting requirement for
firms on how they achieved best execution as an indispensable pillar
of a well-functioning best execution framework that should therefore
be retained. In order to facilitate the implementation of ESMA’s
proposed changes to the RTS 28 reporting requirements for firms, ESMA
suggests further clarifying that similar
13
reporting
requirements also apply to firms that provide RTO services and to
portfolio managers that transmit decisions to deal for execution.
Disclosure of information related to Payment for Order Flow
(PFOF)
35. Some respondents, including the consumer
association which replied to the consultation, supported ESMA’s
proposal to require firms to disclose in their RTS 28 reports
information related to any payments for order flow (PFOF) received in
the summary on execution quality. This would enable investors to make
better informed decisions when choosing a firm to execute their
orders.
36. In contrast, some respondents expressed the view
that the disclosure of this information is only of very limited
informative value for individual clients. A few of those respondents
also noted that such a disclosure would not have any significant
impact, as PFOF-based order execution practices are not common in
their jurisdictions.
37. As highlighted in its public
statement on PFOF13, ESMA believes that PFOF raises serious investor
protection concerns and considers that in most cases it is unlikely
that PFOF could be compatible with the MiFID II framework. ESMA
acknowledges that currently PFOF- related execution practices have
only been observed in some jurisdictions. However, disclosing such
information related to PFOF can effectively contribute to enable
investors to choose the most suitable firms for the execution of
their orders.
38. ESMA notes that its proposals on PFOF should
no longer be relevant in light of the Commission’s proposal to ban
PFOF, currently discussed in the context of the ordinary legislative
procedure. As a consequence, ESMA refrains from developing any
proposal on this topic at this stage. However, in case those
discussions led to a different result compared to the Commission’s
proposal to ban PFOF, ESMA will be available to develop technical
proposals to require firms to disclose PFOF-related information in any
future work related to the best execution reporting framework.
Other technical proposals related to the RTS 28 reporting
framework
39. Moreover, respondents provided comments on a
set of rather technical amendments in
relation to RTS 28
reporting requirements proposed by ESMA in the CP.
40. Only
supporting responses emerged for the following two proposals:
• Some respondents agree with ESMA’s proposal to delete RTS 28
reporting information
on passive and aggressive orders; and
• a few respondents endorse ESMA’s proposed obligation for
firms to explicitly confirm in their execution quality summaries, if
they do not disclose information about any of the required
parameters, and to briefly explain the reason for this absence of
reporting.
13
ESMA35-43-2749:
https://www.
esma. europa. eu/sites/default/files/library/esma35-43-
2749_esma_public_statement_pfof_and_zero-commission_brokers.
pdf
14
41. Relating to the classification for
reporting proposed in Annex I of the possible new RTS 28, especially
with regards to the suggested methodology for the reporting on equity
instruments, some respondents agreed with the (current RTS 28)
classification of instruments. In contrast, some respondents
disagreed with this current classification and noted that
•
the classification by tick size liquidity bands is not
relevant; and that
•
the comprehensive
classification per ISIN/financial instrument is required instead, to
have a more precise classification.
Nevertheless, only few
respondents provided alternative proposals (to the classification of
financial instruments in the current RTS 28) and if so, those
proposals were rather short and of high-level character, inter alia,
the suggestion to classify listed securities by the relative
liquidity (ie, the ratio between total transaction size and average
daily volume).
However, those few respondents also noted that
a more detailed assessment of the current classification would be
needed to develop their proposals further.
42. ESMA welcomes
respondents’ support for its suggested deletion of the RTS 28
reporting obligation related to the information on passive and
aggressive orders and for ESMA’s suggestion of confirmation and
explanation if firms do not disclose required information in their
execution quality summaries. ESMA is aware that modifying the
classification of financial instruments of the RTS 28 reporting
framework would require significant efforts by firms to be
implemented. Moreover, ESMA notes that respondents’ proposals for
alternative categorisations were limited. Consequently, ESMA agrees
with maintaining the current classification of financial instruments
for RTS 28 reporting (as included in Annex I of the current RTS 28).
43. Furthermore, some respondents endorse ESMA’s proposal to
publish separate top five execution venue information (in terms of
trading volumes) for, on the one hand, executed client
orders/decisions to deal and on the other hand, client
orders/decisions to deal transmitted to a third-party entity for
execution. However, a few respondents were of the view that such
separate reporting will not significantly improve the currently
reported RTS 28 information.
44. ESMA believes that the
requirement for firms to publish separate top five information for
executed client orders/decisions to deal and client orders/decisions
to deal routed to a third-party for execution facilitates the
understanding of RTS 28 report information and contributes to enable
investors to make better informed decision on which firm to choose
for their order execution. ESMA is also of the view that firms should
be provided with an additional period of 12 months to foster the
implementation of the proposed amendments to the RTS 28 reporting
framework and suggests to amend the relevant provision accordingly.
45. The proposal to disclose the RTS 28 reports in the CSV
format was supported by some respondents, including one consumer
association which replied to the consultation, who noted that
publishing the reports in this format enhances the accessibility of
the reports, especially for retail investors. This included the
request to clarify that firms should only be
15
required to publish quantitative RTS 28-related
information in the CSV format. Conversely, in the view of a few
respondents, this proposed amendment of data format would cause
significant additional costs in terms of IT-related investments.
46. More divergent comments emerged in reaction to ESMA’s
proposal that RTS 28 reports should be published via a European
Single Access Point (ESAP). While a few respondents supported this
suggestion, in the view of some other respondents disclosing RTS 28
reports through ESAP creates an additional disproportionate
administrative burden for firms. Additionally, a few respondents
focus their comments on the interval of RTS 28 reporting and suggest
that firms should be obliged to quarterly (instead of currently
annually) publish RTS 28 reports to provide market participants with
more up-to-date information on firms’ obtained execution quality.
47. ESMA believes that requiring firms to publish RTS 28
information based on the reporting framework set out in the RTS and
in the machine-readable and easily usable CSV format (in addition to
the publication in electronic format that is clear and easily
readable, such as PDF) will contribute to significantly facilitating
access and comparison of those reports for market participants.
Moreover, ESMA agrees with the need to clarify that firms are only
obliged to publish quantitative RTS 28 data in the CSV format and
proposes to amend the relevant provision accordingly. In ESMA’s view
the publication of RTS 28 reports via ESAP can also facilitate access
to those reports. However, ESMA is also aware that the co- legislators
are currently negotiating the Level 1 provisions for ESAP, which may
impact a (potential) future publication of RTS 28 reports.
16
3. 2 Annex II: Outlook on potential costs and
benefits
48. In light of the responses received to the CP,
the Annex on potential costs and benefits has been updated.
Respondents provided some qualitative information on the level of
resources that would be required to implement the suggested changes to
the best execution reporting requirements for firms and also very
limited quantitative estimations were illustrated. However, the data
presented were too narrow and incomplete to be considered fully
representative of firms’ RTS 28 reporting.
The impact of the
proposals to enhance the adequacy of the best execution reporting
requirements for firms
49. Pursuant to Article 27 of MiFID II
investment firms are required to achieve the ‘best possible result’
for their clients when executing client orders, accounting for
factors, such as price, costs and likelihood of execution. Such firms
are also obliged to publish annually for each class of financial
instruments, the top five execution venues in terms of trading volumes
where they executed client orders (in the preceding year) and
information on the execution quality obtained.
50. The
objective of the best execution reporting obligation by firms
continues to be justified.
However, the existing regime has
proven partially burdensome and not entirely able to achieve the
intended objectives, which is reflected in market participants’ low
use of the current RTS 28 reports.
51. Therefore, ESMA’s
proposals to enhance the adequacy of the current reporting regime aim
at enhancing the reports’ quality of information and facilitating
their use (see paragraphs 21-23 and 26-28 for more detailed
information).
Benefits
52. The suggestions to amend
the RTS 28 framework can contribute to more user-friendly reports, to
support the public and market participants in making informed choices
when choosing a firm for the execution of their orders.
53.
Some respondents provided comments on the benefits of the proposals
suggested by ESMA. Some of those, including one consumer association
which replied to the consultation, highlighted that ESMA’s proposals
related to the RTS 28 reporting framework would enhance access to
those reports and would make them more useful, for example, for
average non-professional investors.
Costs
54. Firms
currently already have to provide the respective RTS 28 reports. The
proposals in this paper aim at standardising and making reporting
obligations, to the extent possible, less burdensome. Therefore, the
proposed more focused requirements for RTS 28 reports should enable
firms in the medium- and long-term to provide them at lower costs than
under the current reporting framework. Furthermore, the information
required to elaborate the RTS 28 reports should be readily available
to firms.
17
55. Some respondents commented on the
costs that would result from implementing ESMA’s proposals in the
current RTS 28 reporting framework. In the view of those respondents,
those expenses (such as one-off costs for firms due to required IT
investments) would exceed the benefits achieved by ESMA’s proposed
amendments to the RTS 28 reporting regime.
Conclusions
56. Considering what has been illustrated above, ESMA
acknowledges the costs which implementing those proposals may cause
for firms. However, ESMA believes that its proposals will contribute
to improve end-users’ available information on the execution quality
of firms and thereby foster investor protection. In this light, the
overall associated costs are proportionate to the benefits and
justified by the objectives described above.
18