Regulatory Update

Under MiFID II Article 27 and associated Delegated Regulation (RTS 27), execution venues are required to publish quarterly reports relating to quality of execution of transactions, including details relating to price, costs, speed, and likelihood of execution for individual instruments. In its recent statement on Friday, 19 March 2021, the FCA said that upcoming RTS 27 reports were “likely to be of limited use for market participants and may even be misleading” due to the pre-Brexit data contained within. As such, the FCA “will not take action against firms who do not produce RTS 27 reports for the rest of 2021”. This step will bring the FCA in line with ESMA’s decision that “the requirement to publish the best execution reports should be suspended… pending a thorough analysis with regard to a possible streamlining of the reports.” (24 July 2020)

Industry Impact

While the FCA’s announcement will bring a quiet sigh of relief for firms that don’t currently produce an RTS 27 report, firms that are currently fully compliant may view this as a waste of already stretched regulatory budgets and resources.

However, while firms may opt to switch off external publication of these reports, they should also take this opportunity to consider how they can leverage existing RTS 27 reporting data for internal analytics to support ongoing monitoring of execution quality, such as:

• Comparison of average effective spread and transaction execution price to market BBO / reference price
• Generation of product level hit ratios using order, RFQ and transaction data used in the existing reports
• Identification of process improvement opportunities by reviewing time elapsed between order acceptance and execution as well as RFQ and quote response
• Monitoring quote presence, especially for liquid products (e.g., liquid single stock equities)

Prior to completely switching off report generation and publication, firms should also undertake a thorough impact assessment of this change, including but not limited to:

• Reviewing downloads of the report from their website and proactively reaching out to any clients that may be using or relying on data contained in these reports
• Ensuring that RTS 27 reporting issues are not closed down / archived without necessary due diligence (for example, if an existing reporting issue is a result of inaccurate reference data, this may also impact other reporting obligations - as such, firms may opt to reclassify the issue instead of closing it down completely)
• Updating any associated policy documents to manage client and supervisory expectations

Firms should also note that the FCA’s suspension applies to RTS 27 only.  RTS 28 best execution reporting requirements, which require firms to disclose their top 5 execution venues, are still applicable and should continue to be published as planned.

Next Steps

In addition to the temporary suspension, the FCA also set out its plans for a consultation on the RTS 27 reporting obligation, with a “view to abolishing it, given concerns that have been expressed around the value these reports bring to the market and to consumers, and the burdens involved in producing them”. This is consistent with EC’s review of the RTS 27 reporting requirements that “indicate that the reports are rarely read by investors” and that therefore “investors cannot or do not make any meaningful comparisons between firms on the basis of this data”. The EC also indicates further review of this reporting obligation as part of its “full review of MiFID II in 2021” in order to “assess whether the requirement to publish the report should be deleted permanently, or if the reports need to be reintroduced in a revised manner.”

 Firms should, therefore, continue to monitor the wider changes in the ongoing and upcoming MiFID II consultations across the EU and UK as the supervisory regimes continues to evolve.

For a conversation on how Capco can help you to navigate the upcoming MiFID II changes and to meet your obligations for the UK and EU MiFID II regimes, please contact Tej Patel.