Published on 10.12.2020

Best Execution: MiFID II & SEC Compliance Essentials Explained

Best execution is a critical regulatory requirement aimed at ensuring firms achieve the most favourable outcomes for their clients when executing orders. Best execution is a key component of investor protection and is mandated under regulatory frameworks such as the Markets in Financial Instruments Directive II (MiFID II) in the European Union and the Regulation Best Execution proposed by the Securities and Exchange Commission (SEC) in the United States.

This article outlines the core principles of best execution, its compliance requirements, and the challenges firms face in meeting these obligations.

Key Takeaways – Best Execution Compliance:

- - Best execution helps to ensure favourable client outcomes in order execution
  - Best Execution is mandated under MiFID II & SEC Regulation Best Execution
  - Key compliance steps include policy development, regular monitoring and yearly disclosures of best execution practices

Understanding MiFID II and SEC Regulation

MiFID II: Implemented in 2018, MiFID II is a comprehensive EU regulatory framework designed to enhance market transparency, improve investor protection, and ensure fair trading practices. It obliges firms to take all sufficient steps to obtain the best possible result for their clients, considering factors such as price, costs, speed, likelihood of execution, and settlement.
SEC Regulation Best Execution: In the U.S., the SEC has proposed Regulation Best Execution to establish a national standard for broker-dealers. This regulation focuses on ensuring that orders are executed under the most favourable terms reasonably available, considering key factors such as price and prevailing market conditions.

Both frameworks emphasise transparency, robust governance, and ongoing monitoring to ensure firms fulfil their best execution obligations.

Key Compliance Requirements for Best Execution

To comply with best execution regulations, firms must meet stringent obligations, including:

Developing Comprehensive Policies: Firms are required to document their approach to achieving best execution, detailing how various execution factors are considered in different scenarios.
Regular Monitoring: Firms must implement processes to continuously monitor and assess the quality of execution achieved across different venues and instruments.
Annual Disclosures: MiFID II mandates firms to publish an annual report identifying the top execution venues used and a summary of how they ensure best execution.
Transparency with Clients: Firms are expected to provide clients with clear information about their execution policies, including how decisions are made to secure the best possible outcomes.
Documentation and Recordkeeping: Firms must maintain detailed records of their execution decisions to demonstrate compliance during regulatory audits or inspections.

Challenges in Best Execution Compliance

Ensuring compliance with best execution regulations is not without challenges. These include:

Market Complexity: The growing diversity of financial instruments and execution venues makes monitoring execution quality increasingly complex.
Data Management: Large volumes of trade and execution data must be analysed to assess performance and identify potential improvements.
Dynamic Market Conditions: Market volatility and liquidity changes require firms to adapt their execution policies regularly.
Evolving Regulations: Regulatory expectations continue to evolve, particularly as authorities such as the SEC propose updates to align with global best practices.

Firms must adopt robust systems and controls to overcome these challenges and demonstrate their commitment to achieving best execution.

How Novatus Global Can Help With Best Execution Compliance

At Novatus Global, we offer tailored solutions to help firms meet their best execution obligations under MiFID II and other regulatory frameworks. From developing comprehensive policies to providing advanced monitoring tools and preparing regulatory reports, we ensure your compliance processes are efficient and effective. Our expertise in regulatory compliance, combined with cutting-edge technology, allows us to support your organisation in navigating the complexities of best execution while building trust with clients and regulators alike.