COBS 11.3 Client order handling
General principles
- (1)
A firm (other than a management company providing collective portfolio management services)1 which is authorised to execute orders on behalf of clients must implement procedures and arrangements which provide for the prompt, fair and expeditious execution of client orders, relative to other orders or the trading interests of the firm.
[Note: paragraph 1 of article 22(1) of MiFID]
- (2)
These procedures or arrangements must allow for the execution of otherwise comparable orders in accordance with the time of their reception by the firm.
[Note: paragraph 2 of article 22(1) of MiFID]
- (3)
A management company providing collective portfolio management services, must establish and implement procedures and arrangements in respect of all client orders it carries out which provide for the prompt, fair and expeditious execution of portfolio transactions on behalf of the UCITS scheme or EEA UCITS scheme it manages.1
[Note: article 27(1) first paragraph of the UCITS implementing Directive]1
A firm must satisfy the following conditions when carrying out client orders:
- (1)
it must ensure that orders executed on behalf of clients are promptly and accurately recorded and allocated;
- (2)
it must carry out otherwise comparable orders sequentially and promptly unless the characteristics of the order or prevailing market conditions make this impracticable, or the interests of the client require otherwise; and
- (3)
it must inform a retail client about any material difficulty relevant to the proper carrying out of orders promptly upon becoming aware of the difficulty.
[Note: article 47(1) of the MiFID implementing Directive,1 article 19(1) of MiFID and article 27(1) second paragraph of the UCITS implementing Directive]1
For the purposes of the provisions of this section, orders should not be treated as otherwise comparable if they are received by different media and it would not be practicable for them to be treated sequentially.
[Note: recital 78 to the MiFID implementing Directive]
Where a firm is responsible for overseeing or arranging the settlement of an executed order or executes the order itself in the course of providing collective portfolio management services,1 it must take all reasonable steps to ensure that any client financial instruments or client funds received in settlement of that executed order are promptly and correctly delivered to the account of the appropriate client.
[Note: article 47(2) of the MiFID implementing Directive,1 article 19(1) of MiFID and article 27(1) third paragraph of the UCITS implementing Directive]1
A firm must not misuse information relating to pending client orders, and shall take all reasonable steps to prevent the misuse of such information by any of its relevant persons.
[Note: article 47(3) of the MiFID implementing Directive,1 article 19(1) of MiFID and article 27(2) of the UCITS implementing Directive]1
Without prejudice to the Market Abuse Directive, for the purposes of the rule on the misuse of information (see COBS 11.3.5 R), any use by a firm of information relating to a pending client order in order to deal on own account in the financial instruments to which the client order relates, or in related financial instruments, should be considered a misuse of that information. However, the mere fact that market makers or bodies authorised to act as counterparties confine themselves to pursuing their legitimate business of buying and selling financial instruments, or that persons authorised to execute orders on behalf of third parties confine themselves to carrying out an order dutifully, should not in itself be deemed to constitute a misuse of information.
[Note: recital 78 to the MiFID implementing Directive]
Aggregation and allocation of orders
A firm is not permitted to carry out a client order or a transaction for own account in aggregation with another client order unless the following conditions are met:
- (1)
it must be unlikely that the aggregation of orders and transactions will work overall to the disadvantage of any client whose order is to be aggregated;
- (2)
it must be disclosed to each client whose order is to be aggregated that the effect of aggregation may work to its disadvantage in relation to a particular order;
- (3)
an order allocation policy must be established and effectively implemented, providing in sufficiently precise terms for the fair allocation of aggregated orders and transactions, including how the volume and price of orders determines allocations and the treatment of partial executions.
[Note: article 48(1) of the MiFID implementing Directive,1 article 19(1) of MiFID and article 28(1) of the UCITS implementing Directive]1
If a firm aggregates a client order with one or more other orders and the aggregated order is partially executed, it must allocate the related trades in accordance with its order allocation policy.
[Note: article 48(2) of the MiFID implementing Directive,1 article 19(1) of MiFID and article 28(2) of the UCITS implementing Directive]1
Aggregation and allocation of transactions for own account
A firm which has aggregated transactions for own account with one or more client orders must not allocate the related trades in a way which is detrimental to a client.
[Note: article 49(1) of the MiFID implementing Directive,1 article 19(1) of MiFID and article 28(3) of the UCITS implementing Directive]1
- (1)
If a firm aggregates a client order with a transaction for own account and the aggregated order is partially executed, it must allocate the related trades to the client in priority to the firm.
- (2)
However, if the firm is able to demonstrate on reasonable grounds that without the combination it would not have been able to carry out the order on such advantageous terms, or at all, it may allocate the transaction for own account proportionally, in accordance with its order allocation policy.
[Note: article 49(2) of the MiFID implementing Directive,1 article 19(1) of MiFID and article 28(4) of the UCITS implementing Directive]1
A firm must, as part of its order allocation policy, put in place procedures to prevent the reallocation, in a way that is detrimental to the client, of transactions for own account which are executed in combination with client orders.
[Note: article 49(3) of the MiFID implementing Directive and article 19(1) of MiFID]
For the purposes of the provisions of this section, the reallocation of transactions should be considered as detrimental to a client if, as an effect of that reallocation, unfair precedence is given to the firm or to any particular person.
[Note: recital 77 to the MiFID implementing Directive]
In this section, carrying out client orders includes:
- (1)
- (2)
the placing of orders with other entities for execution that result from decisions to deal in financial instruments on behalf of clients when providing the service of portfolio management or collective portfolio management;1
- (3)
the transmission of client orders to other entities for execution when providing the service of reception and transmission of orders.