Navigating the complexities of best execution legislation

Best execution is a fundamental regulatory principle that ensures investment firms execute client orders to achieve the most favourable result. The concept has evolved significantly over the past decade, with legislators around the world crafting rules that differ markedly based on regional market structures and regulatory priorities.

In this blog, we examine the regulatory landscape across key jurisdictions and how technology, particularly best execution monitoring and transaction cost analysis (TCA) solutions, plays a vital role in managing compliance.

MiFID II - Europe's comprehensive framework

In Europe, best execution is governed by the Markets in Financial Instruments Directive II (MiFID II), one of the most far-reaching regulatory frameworks in global finance. MiFID II's best execution requirements are centred around Article 27, which mandates that investment firms take "all sufficient steps" to achieve the best outcome for their clients when executing orders.

The directive outlines specific factors firms must consider when assessing execution quality, including price, speed, likelihood of execution, settlement size, nature of the order, and any other relevant consideration. Firms must have an execution policy, regularly review their execution venues, and disclose their top five execution venues. Beyond this, MiFID II requires firms to demonstrate that their execution arrangements consistently deliver optimal results. Regulatory Technical Standards (RTS 27 and RTS 28) were initially introduced to provide transparency, though these requirements have been subject to ongoing debate and reform.

The FCA and UK best execution post-Brexit

Since Brexit, the UK's Financial Conduct Authority (FCA) has maintained MiFID II-derived best execution rules but has taken steps to simplify certain obligations. Notably, the FCA removed RTS 27 reporting requirements for UK execution venues, citing a lack of utility. The UK's regulatory approach remains principles-based, emphasising that firms should focus on achieving genuine best outcomes for clients rather than simply adhering to prescriptive rules.

The FCA has also been vocal about the need for firms to monitor best execution more effectively, calling out inadequate governance and oversight in multiple Market Watch publications. These publications serve as a practical guide for firms looking to align their best execution processes with the FCA's expectations.

SEC and FINRA - US best execution obligations

In the US, best execution is primarily governed by rules from the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA). FINRA Rule 5310 requires broker-dealers to use "reasonable diligence" to determine the best market for a security and to execute orders at the most favourable terms. The SEC's Regulation NMS adds a layer of market structure rules that affect order routing and execution quality.

US regulators have increasingly focused on transparency around execution quality. SEC Rule 606 requires broker-dealers to disclose order routing practices, giving investors insight into where their orders are being sent. Recent SEC proposals aim to enhance competition and transparency further, including reforms to the practice of payment for order flow (PFOF), which has come under significant scrutiny.

Best execution in Asia-Pacific

The Asia-Pacific region presents a diverse regulatory landscape for best execution. In Australia, the Australian Securities and Investments Commission (ASIC) requires market participants to take reasonable steps to achieve the best outcome for clients, with specific rules under its Market Integrity Rules. Singapore's Monetary Authority (MAS) adopts a principles-based approach, requiring firms to obtain the best possible result for clients. Hong Kong's Securities and Futures Commission (SFC) also mandates best execution, focusing on factors such as price, costs, and speed.

While these jurisdictions share the underlying principle of protecting clients, the specifics vary significantly, creating challenges for firms operating across borders.

Emerging best execution standards in the Middle East

Regulatory frameworks in the Middle East are also evolving. The Dubai Financial Services Authority (DFSA) and the Abu Dhabi Global Market (ADGM) have established best execution standards that draw on MiFID II principles. These requirements are increasingly important as the region positions itself as a global financial hub, attracting firms that must navigate multi-jurisdictional compliance.

The challenges of multi-jurisdictional best execution

For firms operating across multiple jurisdictions, best execution compliance presents a significant challenge. Key issues include:

• Fragmented standards: Each jurisdiction has its own interpretation of best execution, making it difficult for firms to adopt a single, unified approach.
• Data management: Demonstrating best execution requires access to comprehensive market data, which can be difficult to aggregate across different markets and asset classes.
• Execution venue analysis: Firms must regularly review and compare execution venues, assessing their performance across the factors mandated by their respective regulators.
• Reporting and disclosure: Different reporting requirements across jurisdictions add to the operational burden, particularly for firms with global operations.

The role of technology

Given the complexity of best execution compliance, technology is essential. Best execution monitoring and TCA tools provide firms with the ability to:

• Monitor execution quality in real time: Automated systems can analyse execution outcomes as they occur, flagging potential issues before they become compliance breaches.
• Aggregate and analyse market data: Technology solutions can consolidate data from multiple execution venues and markets, providing a comprehensive view of execution quality across asset classes.
• Generate regulatory reports: Automated reporting tools can produce the disclosures required by different regulators, reducing the manual effort involved in multi-jurisdictional compliance.
• Support governance and oversight: Best execution dashboards and analytics tools enable senior management to oversee execution quality and make informed decisions about execution policies.

Looking ahead

Best execution regulation continues to evolve. In Europe, the MiFID II/MiFIR review is expected to bring further changes, potentially simplifying some requirements while introducing new ones. In the US, SEC proposals could reshape how orders are executed and routed. Across Asia and the Middle East, regulatory standards are becoming more sophisticated, reflecting the growth and globalisation of these markets.

For firms, staying ahead of these developments requires not only a thorough understanding of the regulatory landscape but also investment in the right technology and processes. The firms that succeed will be those that treat best execution not as a box-ticking exercise but as a core component of their client service offering.