MiFID II - Best execution

The revision of MiFID I leads to important changes in rules and regulations with regard to investor protection. The investor protection is enhanced due to stricter and new rules of conduct under MiFID II.

Investment firms must take adequate measures to obtain the best possible result when executing the client's orders. This obligation is referred to as the best-execution obligation.

This obligation means inter alia  that the investment firm must choose/select the execution location that offers the highest probability of the best possible result for the client. To do so, the investment firm takes a number of factors into account, such as the qualification of the client, the price of the financial instrument, the execution costs, the speed and the probability of execution and settlement, and the size and nature of the order.

The best execution obligation already existed under MiFID I. It has been broadened and has become more stringent under MiFID II.

Key changes

The key changes of the best-execution obligation compared to MiFID I that apply to investment firms and execution venues are:

  • Investment firms are obliged to draw up a policy for their order execution. This obligation already applied under MiFID I but MiFID II provides an extra explanation: the policy must be clear, and sufficiently detailed for the client and it must be written in an understandable manner. In addition, MiFID II stipulates that investment firms must constantly monitor the effectiveness of their policy. If it appears during the monitoring that the policy is not effective, the policy has to be adjusted adequately. 
  • Investment firms must publish annually per category of financial instrument and per type of client the top 5 of venues where they execute client orders and/or the top 5 investment firms which they transmit orders to. In addition, based on their monitoring activities, they must prepare and publish an analysis of the quality of the execution per category of financial instrument.
  • The concept ‘financial instrument’ has been revised in MiFID II. Commodity derivatives and emission rights are now also included under the term financial instrument. As a result, investment firms that provide investment services or perform investment activities for commodity derivatives and emission rights also have to fulfil the best-execution obligation.

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