Deutsche Börse s Response to CESR s Public Consultation. Best Execution under MiFID

Transcription

1 Deutsche Börse s Response to CESR s Public Consultation Best Execution under MiFID Frankfurt / Main, 16 th March 2007

2 under MiFID 1 Executive Summary Deutsche Börse Group appreciates the opportunity to participate in CESR s public consultation on Best Execution under MiFID. We welcome CESR s approach in viewing Level 3 guidelines as developing consistent and harmonised market standards rather than setting new provisions beyond those of Level 1 and Level 2. Best Execution is at the very core of MiFID. We therefore welcome and appreciate CESR s efforts in detailing the provisions at Level 3 and view these as paramount in preparing the industry for the compliance and facilitating the comprehension of the requirements arising from Article 21 of the Level 1 Directive and Article 45 of the Level 2 Directive. Deutsche Börse Group recommends CESR to pursue the following objectives for the outcome of Level 3 consultations: We urge CESR to ensure that no divergent national implementation of best execution requirements is enabled. We kindly ask CESR to promote supervisory convergence of the best execution provisions. If the provisions, which are the core of MiFID, are interpreted differently by national Competent Authorities, we fear that the goal of MiFID, namely market efficiency and investor protection alongside with level playing field, would be undermined. Therefore, we view the harmonisation of market standards with respect to best execution provisions at Level 3 consultation process as imperative in order to enable their effective and accurate implementation. Below, please find our detailed remarks and recommendations.

3 under MiFID 2 Detailed Remarks Execution Policies and Arrangements Question 1 (page 7): Do respondents agree with CESR s views on: - the main issues to be addressed in an (execution) policy? Are there any other major aspects or issues that should ordinarily be included in an (execution) policy? Deutsche Börse Group generally agrees to the proposed main issues to be included in the execution policy. However, we would welcome further detailing on the content of the execution policy already at this stage. The listing of execution policy issues as presented lacks clear differentiation between different client categories, as e.g. part c) and d) do not clarify that the different factors influencing firm s execution approach and their relative importance differ with respect to whether the client is retail or professional. The execution policy must reflect different execution approaches depending on the client categorisation. Moreover, we would urge CESR to ensure that all venues are listed by names, otherwise disclosure would not make sense and investors would not be able to follow whether execution venues are appropriate and best execution is provided. - the execution policy being a distinct part of a firm's execution arrangements for firms covered by Article 21? - the execution policy under Article 21 being a statement of the most important and / or relevant aspects of a firm's detailed execution arrangements? We support CESR s distinction of execution arrangements and execution policy. We view that execution policy is the communication of the most important and relevant aspects towards the client (taking into account client classification as retail or professional) aimed at enabling the client to assess investment firm s policy in achieving the best possible result. Execution arrangement extends the scope of the execution policy by including all additional efforts of the firm to provide best execution, e.g. organisational requirements on the firm s compliance with best execution provisions. This is not directly related to a client order case by case, but to handling of client orders in general.

4 under MiFID 3 Question 2 (page 7): For routine orders from retail clients, Article 44(3) requires that the best possible result be determined in terms of the "total consideration" and Recital 67 reduces the importance of the Level 1 Article 21(1) factors accordingly. In what specific circumstances do respondents consider that implicit costs are likely to be relevant for retail clients and how should those implicit costs be measured? For the purposes of this question we subdivide the total transaction costs as follows: In contrast to institutional investors for whom timing and opportunity costs as well as market impact costs are important factors in determining whether best execution has been delivered, we view that for a retail client it is crucial to include market impact costs which are highly relevant in terms of best execution.

5 under MiFID 4 How important market impact costs are independently of whether the client status is retail or wholesale shows the following fact-finding: even for very liquid DAX values, the liquidity premium (which is half of the bid-ask spread) for a retail order counts 3 basis points, for somewhat less liquid MDAX values it amounts to yet 8 basis points. Comparing these figures to explicit costs leads to the conclusion that the latter are of minor relevance: the transaction costs (including clearing and settlement fees) on Xetra for a retail order are only 1,25 basis points. The costs charged by the bank or broker as execution venue related costs are in this range or lower. A method for quantifying market impact costs should take into account the price differential in a situation where market impact costs exist compared to a situation in which standard market conditions prevail. We would recommend measuring the market impact cost by a round-trip calculation quantifying the liquidity cost in basis points. Hence, the implicit costs and market impact costs in particular are potentially of much more importance for delivering best execution than explicit transaction costs for both wholesale and retail clients. This holds all the more, the less liquid a share is. As experience shows that retail investors tend to invest in less liquid shares, consideration of implicit transaction costs is of particular significance for retail orders in terms of the best execution principle. Thus, we deem the inclusion of implicit costs highly important and urge CESR to ensure their inclusion in the total cost consideration principle at Level 3 elaboration of market standards. Question 3 (page 10): Do respondents agree with CESR s view on the use of a single execution venue? Yes, we agree with CESR that there may be circumstances which justify the election of one single execution venue. The only qualitative decision should be whether the chosen execution venue provides a better result on a consistent basis than other execution venues. This approach though: - must be soundly justified by objective criteria, and - ensure that competition among execution venues is not endangered.

6 under MiFID 5 Question 4 (page 11): Do respondents agree with CESR s views on the degree of differentiation of the (execution) policy? Yes, we agree with CESR s approach in the differentiation level of the execution policy. The proposed differentiation enables to identify which minimum set of information must be included in the execution policy in order to enable the client to understand investment firm s execution approach and analyze whether best execution has been provided. Nevertheless, we would like to emphasize that there is no standard execution policy that applies to all investment firms, portfolio managers and RTOs. It should be rather left to the discretion of the firms who know their client base and client categorisation to determine which policy suits and which level of differentiation is necessary, when taking into account client s needs, characteristics of the client and order type. Disclosure Question 5 (page 13-14): Do respondents agree that the appropriate level of information disclosure for professional clients is at the discretion of investment firms, subject to the duty on firms to respond to reasonable and proportionate requests? On the basis of this duty, should firms be required to provide more information to clients, in particular professional clients, than is required to be provided under Article 46(2) of Level 2? We view CESR s approach as rightful in recommending investment firms discretion to be used in determining the level and the scope of information presentable to professional clients. The imperative question to be posed is what usage of additional information as well as the value added thereof the client will have. Where retail clients rely on the provision of appropriate information and are not able to assess whether the best possible result has been provided without those, professional clients are mostly endued with high level of financial literacy and often pursue investment strategies which require detailed market information prior to the execution of their order. Against this background, it is imaginable to make available information to the professional client on demand.

7 under MiFID 6 Therefore, we see no need to treat professional clients differently from retail clients in providing them with information beyond those required under Article 46(2) Level 2, since this would create excessive burden of information provision on the part of the investment firm without apparent added value to the professional client. Consent Question 6 (page 15): Do respondents agree with CESR on how "prior express consent" should be expressed? If not, how should this consent be manifested? How do firms plan to evidence such consent? We generally agree with the proposed handling and obtaining of prior express consent from the client. However, we recommend CESR to abstain from using the wording tacit prior consent, as this term is new and not used in the Directive. Moreover, allowing for tacit prior consent might lead to circumventing obtaining client s consent to internalisation of orders in a manner such that the client is not explicitly aware of this possibility. Therefore, we urge CESR to express clearly that tacit consent is not allowed neither for the approval of the execution policy nor for the possibility that internalisation occurs, but to require for both express prior consent. Chains of Execution Question 7 (page 18): Do respondents agree with CESR s analysis of the responsibilities of investment firms involved in a chain of execution? We support CESR s approach in determining the responsibility in the chain of execution. We view that MiFID clearly defines who is owing best execution as defined by respective Articles: any party that is acting vis-à-vis the client is responsible for delivering best execution as defined in Article 21 Level 1, any party not executing the client order but being

8 under MiFID 7 integrated in the chain of execution due to e.g. intermediary purposes, namely portfolio managers and RTOs, owes best execution under the Article 45 Level 2. We therefore find misleading the chosen wording Where best execution responsibilities overlap, since investment firms, portfolio managers and RTOs will need to clarify under which Article they must comply with best execution prior to engage in client order execution. The latter however should not rely on due diligence of the parties contacted in the chain of execution to provide best execution, but should monitor and examine their execution approaches. In our view, this is exactly where competition is enhanced and maximum investor protection provided as intended by best execution requirements under MiFID. Execution Quality Data Question 8 (page 22): What core information and/or other variables do respondents consider would be relevant to evaluating execution quality for the purposes of best execution? We appreciate CESR s efforts made in this public consultation and deem as helpful the contribution to better understanding compliance requirements inherent in best execution provisions. We believe that core information needed by a client (either retail or professional) have all been touched in the questions above and that other variables possibly relevant in evaluating whether the best possible result has been provided would be rather individually exemplified. Nevertheless we would like to emphasize once again that implicit costs, market impact costs in particular as well as any other circumstance which have relevant influence on the execution quality, should be considered when determining the best possible result for the retail client.