COBS 11.2 Best execution

A firm must take all reasonable steps to obtain, when executing orders, the best possible result for its clients taking into account the execution factors.

2A management company must, in relation to each UCITS scheme or EEA UCITS scheme it manages, act in the best interests of the scheme when executing decisions to deal on its behalf in the context of the management of its portfolio, and COBS 11.2.1 R applies in relation to all such decisions.

When executing a client order, a firm must take into account the following criteria for determining the relative importance of the execution factors:

1. (1)

   the characteristics of the client including the categorisation of the client as retail or professional;

2. (2)

   the characteristics of the client order;

3. (3)

   the characteristics of financial instruments that are the subject of that order;

4. (4)

   the characteristics of the execution venues to which that order can be directed; and2

5. (5)

   for a management company, the objectives, investment policy and risks specific to the UCITS scheme or EEA UCITS scheme, as indicated in its prospectus or instrument constituting the scheme.2

Where a firm executes an order on behalf of a retail client, the best possible result must be determined in terms of the total consideration, representing the price of the financial instrument and the costs related to execution, which must include all expenses incurred by the client which are directly related to the execution of the order, including execution venue fees, clearing and settlement fees and any other fees paid to third parties involved in the execution of the order.

For the purposes of delivering best execution for a retail client where there is more than one competing venue to execute an order for a financial instrument, in order to assess and compare the results for the client that would be achieved by executing the order on each of the execution venues listed in the firm's order execution policy that is capable of executing that order, the firm's own commissions and costs for executing the order on each of the eligible execution venues must be taken into account in that assessment.

A firm must not structure or charge its commissions in such a way as to discriminate unfairly between execution venues.

A firm must establish and implement effective arrangements for complying with the obligation to take all reasonable steps to obtain the best possible result for its clients. In particular, the firm must establish and implement an order execution policy to allow it to obtain, for its client orders, the best possible result in accordance with that obligation.

The order execution policy must include, in respect of each class of financial instruments, information on the different execution venues where the firm executes its client orders and the factors affecting the choice of execution venue. It must at least include those execution venues that enable the firm to obtain on a consistent basis the best possible result for the execution of client orders.

1. (1)

   Whenever there is a specific instruction from the client, the firm must execute the order following the specific instruction.

[Note: article 21(1) of MiFID]

1. (2)

   A firm satisfies its obligation under this section to take all reasonable steps to obtain the best possible result for a client to the extent that it executes an order, or a specific aspect of an order, following specific instructions from the client relating to the order or the specific aspect of the order.

[Note: article 44(2) of the MiFID implementing Directive]

A firm must provide appropriate information to its clients on its order execution policy.

1. (1)

   A firm must provide a retail client with the following details on its execution policy in good time prior to the provision of the service:

   1. (a)

      an account of the relative importance the firm assigns, in accordance with the execution criteria, to the execution factors, or the process by which the firm determines the relative importance of those factors;

   2. (b)

      a list of the execution venues on which the firm places significant reliance in meeting its obligation to take all reasonable steps to obtain on a consistent basis the best possible result for the execution of client orders;

   3. (c)

      a clear and prominent warning that any specific instructions from a client may prevent the firm from taking the steps that it has designed and implemented in its execution policy to obtain the best possible result for the execution of those orders in respect of the elements covered by those instructions.

2. (2)

   This information must be provided in a durable medium, or by means of a website (where that does not constitute a durable medium) provided that the website conditions are satisfied.

2A management company must make available appropriate information on its execution policy and on any material changes to that policy to the Unitholders of each scheme it manages.

Where the order execution policy provides for the possibility that client orders may be executed outside a regulated market or an MTF, the firm must, in particular, inform its clients about this possibility.

1. (1)

   A firm (other than a management company providing collective portfolio management services for a UCITS scheme or an EEA UCITS scheme) must obtain the prior consent of its clients to the execution policy.2

2. (2)

   In the case of a management company providing collective portfolio management services for an ICVC that is a UCITS scheme, or for an EEA UCITS scheme that is structured as an investment company, the management company must obtain the prior consent of the ICVC or investment company to the execution policy.2

3. (3)

   In the case of a management company that is the ACD of an ICVC that is a UCITS scheme, (2) does not apply where the ACD is the sole director of the ICVC.2

A firm must obtain the prior express consent of its clients before proceeding to execute their orders outside a regulated market or an MTF. The firm may obtain this consent either in the form of a general agreement or in respect of individual transactions.

A firm must monitor the effectiveness of its order execution arrangements and execution policy in order to identify and, where appropriate, correct any deficiencies. In particular, it must assess, on a regular basis, whether the execution venues included in the order execution policy provide for the best possible result for the client or whether it needs to make changes to its execution arrangements. The firm must notify clients of any material changes to their order execution arrangements or execution policy.

1. (1)

   A firm must review annually its execution policy, as well as its order execution arrangements.

2. (2)

   This review must also be carried out whenever a material change occurs that affects the firm's ability to continue to obtain the best possible result for the execution of its client orders on a consistent basis using the venues included in its execution policy.

1. (1)

   A firm other than a management company must be able to demonstrate to its clients, at their request, that it has executed their orders in accordance with its execution policy.

   2
2. (2)

   A management company must be able to demonstrate that it has executed orders on behalf of any UCITS scheme or EEA UCITS scheme it manages in accordance with its execution policy.2

A firm must, when providing the service of portfolio management or, for a management company, collective portfolio management,2 comply with the obligation to act in accordance with the best interests of its clients when placing orders with other entities for execution that result from decisions by the firm to deal in financial instruments on behalf of its client.

A firm must, when providing the service of reception and transmission of orders, comply with the obligation to act in accordance with the best interests of its clients when transmitting client orders to other entities for execution.

In order to comply with the obligation to act in accordance with the best interests of its clients when it places an order with, or transmits an order to, another entity for execution, a firm must:

[Note: article 45(3) of the MiFID implementing Directive and article 26(1) of the UCITS implementing Directive]2

1. (1)

   take all reasonable steps to obtain the best possible result for its clients taking into account the execution factors. The relative importance of these factors must be determined by reference to the execution criteria and, for retail clients,2 to the requirement to determine the best possible result in terms of the total consideration (see COBS 11.2.7 R).

   A firm satisfies its obligation to act in accordance with the best interests of its clients, and is not required to take the steps mentioned above, to the extent that it follows specific instructions from its client when placing an order with, or transmitting an order to, another entity for execution;

   2

[Note: paragraph 1 and 2 of article 45(4) of the MiFID implementing Directive and article 26(2) first paragraph of the UCITS implementing Directive]2

1. (2)

   establish and implement a policy to enable it to comply with the obligation to take all reasonable steps to obtain the best possible result for its clients. The policy must identify, in respect of each class of instruments, the entities with which the orders are placed or to which the firm transmits orders for execution. The entities identified must have execution arrangements that enable the firm to comply with its obligations under this section or, for a management company, must only enter into arrangements for execution where those arrangements are consistent with the requirements of this section,2 when it places an order with, or transmits an order to, that entity for execution;

[Note: paragraph 1 of article 45(5) of the MiFID implementing Directive and article 26(2) second paragraph of the UCITS implementing Directive]2

1. (3)

   provide appropriate information to its clients on the policy established in accordance with COBS 11.2.32R (2) or, for a management company, make available to Unitholders appropriate information on that policy and on any material changes to it;2

[Note: paragraph 2 of article 45(5) of the MiFID implementing Directive and article 26(2) second paragraph last sentence of the UCITS implementing Directive]2

1. (4)

   monitor on a regular basis the effectiveness of the policy and, in particular, the execution quality of the entities identified in that policy and, where appropriate, correct any deficiencies; and

[Note: first paragraph of article 45(6) of the MiFID implementing Directive and article 26(3) first paragraph of the UCITS implementing Directive]2

1. (5)

   review the policy annually. This review must also be carried out whenever a material change occurs that affects the firm's ability to continue to obtain the best possible result for its clients.

[Note: second paragraph of article 45(6) of the MiFID implementing Directive and article 26(3) second paragraph of the UCITS implementing Directive]2

2A management company must be able to demonstrate that it has placed orders on behalf of any UCITS scheme or EEA UCITS scheme it manages in accordance with the policy referred to in COBS 11.2.32 R (2).

The provisions applying to a firm which places orders with, or transmits orders to, other entities for execution (see COBS 11.2.30 R to COBS 11.2.33 G) will not apply when the firm which provides the service of portfolio management or collective portfolio management2 and/or service of reception and transmission of orders also executes the orders received or the decisions to deal on behalf of its client's portfolio. In those cases the requirements of this section for firms who execute orders apply (see COBS 11.2.1 R to COBS 11.2.29 R).