Best Execution – definition, benefits and FAQ’s

What is best execution?

Best execution is a regulatory requirement that obligates investment firms take all the necessary steps to achieve the most favourable outcome for their clients when executing trades.

Best execution requires a comprehensive approach: investment firms must consider multiple factors, including price, costs, speed, likelihood of execution and settlement, size, nature, and any other relevant aspects when executing trades.

Investment firms are required to have robust processes in place to regularly monitor and evaluate the effectiveness of their best execution arrangements, ensuring they consistently adhere to regulatory standards. This not only protects clients' interests but also reinforces trust in the financial markets by promoting transparency and accountability within trading practices.

 

 

Best execution MiFID

The 'MiFID', or the European Markets in Financial Instruments Directive, is an essential framework that governs trading activities across Europe. It aims to foster transparency and ensure fair competition among trading platforms, thereby protecting investors and promoting market integrity.

One of the critical aspects of MiFID is its criteria for FX best execution:

• Price: Ensuring that the price obtained for an FX transaction is the best possible under the circumstances.
• Costs: Considering the total cost associated with execution, including any fees or charges that may impact the overall price.
• Speed: Evaluating how quickly a transaction can be executed, as time can significantly influence trade outcomes.
• Likelihood of execution and settlement: Assessing the probability that an order will be executed and settled successfully, minimising risks of failed trades.
• Size: Taking into account the scale of the order, as large orders may require special handling to avoid market disruption.
• Nature: Considering any specific characteristics of the order that may affect execution, such as the type of financial instrument being traded.
• Other relevant considerations: Including any additional factors pertinent to the execution of an order, which may vary depending on the specific circumstances of the trade.

This comprehensive set of criteria applies to all orders, regardless of whether they are initiated directly by the client or placed on their behalf by an investment manager. By adhering to these standards, MiFID ensures that investment firms act in the best interests of their clients, promoting trust and confidence in the financial markets.

 

What are the benefits of best execution?

Transparency in FX execution: Best execution ensures that transactions are carried out at prices that are competitive in the market, helping asset managers and corporates to reduce execution costs and optimize the execution arrangements.

Regulatory Compliance: Adhering to best execution principles often involves compliance with regulatory standards that promote fair trading practices. This demonstrates the business’ dedication to operating within legal frameworks, fostering trust with stakeholders and regulators.

 

Strategies for achieving best execution:

FX transaction cost analysis (TCA)

To achieve best execution in FX trading, it is crucial to use an independent transaction cost analysis (TCA) provider to assess and monitor FX costs.

This tool provides comprehensive FX transparency into the execution process, enabling asset managers and corporates to identify cost-saving opportunities and minimise inefficiencies. By leveraging TCA, businesses can make data-driven decisions, optimise their trading strategies, and enhance overall financial performance.

FX counterparty risk management framework

Establishing a robust framework for counterparty selection, evaluation, and monitoring is crucial. This framework should consider a wide range of risk factors, such as counterparty credit ratings and counterparty CDS levels, etc. By thoroughly evaluating these factors, asset managers and corporates can ensure they are working with the most reliable and cost-effective counterparties, ultimately achieving best execution and managing FX risk.

FX execution platform

Adopting a multi-bank FX execution platform is a strategic move for asset managers and corporates looking to optimise their foreign exchange transactions. Such platforms bring together multiple liquidity providers, who compete to offer the best FX rates available. This competitive environment allows businesses to secure the most advantageous rates, leading to improved financial outcomes and ensuring best execution.

FX execution contingency plan

It's crucial to have a backup strategy for FX execution, especially if a counterparty becomes unavailable. This plan should address the legal and operational complexities involved in FX trade execution and settlement. By preparing for such eventualities, businesses can maintain continuity in their operations and minimise disruptions.