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  1. Point in time
    2006-07-07

COB 7.5 Best execution

Application

COB 7.5.1R

This section applies to a firm when executing a customer order in a designated investment.

Purpose

COB 7.5.2G

Principle 2 (Skill, care and diligence) and Principle 6 (Customers' interests) require a firm to act with due skill, care and diligence and to pay due regard to its customer's interests. This section sets standards for firms when executingcurrent customer orders in designated investments, particularly in the securities and derivatives markets, to obtain for customers the best price available to the firm, given the kind and size of such transactions.

When best execution is owed

COB 7.5.3R

A firm that executes a customer order in a designated investment must provide best execution, unless COB 7.5.4 R applies.

Exceptions

COB 7.5.4R

COB 7.5.3 R does not apply in any of the following circumstances:

  1. (1)

    the customer order is for:

    1. (a)

      the purchase of a life policy; or

    2. (b)

      the purchase of or sale of units in a regulated collective investment scheme from or to the operator of that scheme;

  2. (2)

    the firm has agreed with an intermediate customer that it need not owe a duty of best execution to him, unless that customer is:1

    1. (a)

      the trustee of an occupational pension scheme or an OPS collective investment scheme; or

    2. (b)

      the trustee of any other trust for whom, and to the extent that, the firm acts as a permitted third party under COB 11.6 (Delegation to a permitted third party); or

  3. (3)

    the firm relies on another person to whom it passes a customer order for execution to provide best execution, but only if it has taken reasonable care to ensure that he will do so.

Providing best execution

COB 7.5.5R

To provide best execution, a firm must:

  1. (1)

    take reasonable care to ascertain the price which is the best available for the customer order in the relevant market at the time for transactions of the kind and size concerned; and

  2. (2)

    execute the customer order at a price which is no less advantageous to the customer, unless the firm has taken reasonable steps to ensure that it would be in the customer's best interests not to do so.

COB 7.5.6E
  1. (1)

    In order to take reasonable care under COB 7.5.5 R (1) , a firm:

    1. (a)

      should disregard any charges and commission made by it or its agents that are disclosed to the customer under COB 5.7 (Disclosure of charges, remuneration and commission);

    2. (b)

      need not have access to competing exchanges, or to all, or a minimum number of, available price sources; but if a firm can access prices displayed by different exchanges and trading platforms and make a direct and immediate comparison, it should execute the customer order at the best price available to the firm on such exchanges or trading platforms, if this is in the best interests of the customer;

    3. (c)

      should pass on to the customer the price at which it executes the transaction to meet the customer order;

    4. (d)

      should not take a mark-up or mark-down from the price at which it executes the customer order; and

    5. (e)

      that is engaged in programme trading should ensure that it applies the duty of care in COB 7.5.5 R to each individual transaction.

  2. (2)

    In relation to a customer order for euro priced securities traded on the London Stock Exchange, if the firm has decided to execute in sterling, the firm should take reasonable care to ascertain the best price available in sterling and to deal at a price no less advantageous to the customer.

  3. (3)

    In relation to a customer order for shares that are traded on SETS, a firm's obligations under COB 7.5.5 R will be satisfied if, subject to COB 7.5.6 E (1)(b), a firm executes the customer order through SETS.

  4. (4)

    If, in relation to a customer order for securities that are traded on SETS, a firm does not execute the customer order through SETS, the firm should ensure that:

    1. (a)

      when a customer order is for normal settlement and is within the size currently displayed on SETS, the price obtained at least matches the best bid or offer price available on SETS;

    2. (b)

      when a customer order is larger than the total of limit orders displayed on the best bid or offer on SETS, but there is sufficient depth overall, the price obtained at least matches the weighted average price of all orders for that security displayed on SETS;

    3. (c)

      when a customer order is larger than the totality of orders currently displayed on the best bid or offer on SETS, and execution at the weighted average price would be impracticable, it uses due skill and care to ascertain the best available price, having regard to the price of recently executed transactions of a similar size, any prices or quotes available to it, and to prevailing market conditions;

    4. (d)

      when there are no current bid or offer prices displayed on SETS, it refers to the previous best bid or offer prices, and to the latest published trades in the relevant security, and uses due skill and care to determine the best price in the light of the information available; and

    5. (e)

      when a customer order is subject to a special condition (for example, non-standard settlement), the price should at least match the price available on SETS, and that any charge and commission in respect of the non-standard element is separately and appropriately disclosed to the customer.

  5. (5)

    Compliance with (1), (2) and (3) may be relied on as tending to establish compliance with COB 7.5.5 R (1).

  6. (6)

    Contravention of (1) or (2) may be relied on as tending to establish contravention of COB 7.5.5 R (1).

  7. (7)

    Compliance with (3) or (4) may be relied upon as tending to establish compliance with COB 7.5.5 R (2).

  8. (8)

    Contravention of (4) may be relied upon as tending to establish contravention of COB 7.5.5 R (2).

COB 7.5.7G

Disclosure of charges and commission in relation to non-standard settlement under COB 7.5.6 E (4)(e) may be made on a contract or confirmation note, or in a separate written statement to the customer before the transaction is executed. If the issue of a written statement in advance of the transaction is impracticable, the firm may make an oral disclosure to the customer provided it discloses the charges and commission promptly in writing after the transaction is executed.

COB 7.5.8G

An example of a circumstance in which a firm may, under COB 7.5.5 R, execute a customer order at a price which is less advantageous than the best available price is when a firm has a continuing relationship with a customer, and reasonably expects that it will be able to secure compensating advantages for the customer in other transactions that should provide best execution for the customer over a period or a series of transactions. In such cases, the decision would need to be taken and justified in respect of each separate transaction as it arose.

COB 7.5.9G

The evidential provision relating to mark-ups and mark-downs in COB 7.5.6 E (1)(d) does not prevent firms from being remunerated by means of mark-ups or mark-downs provided that such remuneration is disclosed to the customer as required by COB 8.1.15 E (Content of a confirmation of transaction: general requirements).2

COB 7.5.10G

Where a customer order is subject to a special condition as envisaged in COB 7.5.6 E (4)(e), the firm should disclose any additional cost involved in satisfying the special condition or in respect of the non-standard element. If, however, it is not possible for the charge to be "unbundled" from the price itself, firms are permitted to deal on a bundled basis subject to the overriding obligation to provide best execution.2