Most Firms Overwhelmed by MiFID II’s Best Ex Rules


Asset managers will have their work cut out for them to be ready in four months’ time, according to a new survey conducted by Liquidnet.

The onset of MiFID II may be only four months away, but a significant number of asset managers are not prepared to meet the best execution obligations, according to a new study, “Re-Engineering Best Execution,” conducted by Liquidnet, provider of a global institutional trading network.

Canvassing 55 North American and European heads of trading and dealing, the study reveals that just a mere 6 percent of respondents are ready to meet the requirements that obliges firms take “all sufficient steps” to ensure they are achieving the optimal results for their clients.

Rebecca Healey, head of EMEA market structure for Liquidnet, notes that in many ways the lack of preparedness is not surprising given the sheer scale of the change required. Unlike MiFID I, the updated rulebook applies to the broad spectrum of asset classes beyond equities.

Healey adds that best execution is no longer a mere “look back and check” on the outcome of an individual order, but the creation and implementation of a process that enables the trader to be in possession of as much valuable information as possible, throughout the lifecycle of a trade.”

The other challenge, according to Healey is that there was still uncertainty this year as to the final version of MiFID II because the European Securities and Markets Authority’s (ESMA) was still clarifying the finer points with the publications of its updated Q&As in the spring and summer.

“It has taken time for asset managers to realize that there will be a shift from the ad hoc process to prove best execution for equities under MiFID I to a much more systematic and holistic process, which is mandated across the entire organization from the senior manager to the dealer and compliance officer” says Healey.

“Execution is no longer just the concern of the dealing desk but as an integral part of the investment process, must involve firm-wide organization from senior management through compliance,” Healey adds. “Best Ex under MiFID II requires systematic monitoring of execution outcomes. Not only do you need to demonstrate these outcomes, you also need to show what steps you take to adjust workflow processes when the outcome is sub-optimal.”

The study found that only one-third of respondents is planning to make changes to the trading workflow, while more than a quarter is specifically investing in technology to ensure a more systematic approach to best execution.

However, 85 percent of respondents acknowledge that there is more that individual firms can do internally to improve execution performance. For example, firms are focusing on adverse venue selection or improving opportunity cost lost through adjustments to workflows such as portfolio management timing, rather than just looking to their broker to enhance execution performance.

Fund managers are also reviewing their approach to transaction cost analysis (TCA), which has been the traditional measure for best execution in the equity space. The study finds that the industry is begin to migrate “towards more holistic best-execution analysis” to better understand larger orders as well as enhance analysis around bespoke “high-touch” and fixed-income trading.

Broker relationships are also on the agenda.

In the Liquidnet survey 70 percent of asset managers report that they are reviewing new liquidity providers outside their traditional brokers and more than two-thirds of respondents are no longer choosing where to trade by broker alone.

“They are considering why they choose venues and platforms, the impact of counterparty behaviour, and how to capture evidence in an audit trail,” says Healey.

Your firm not ready for MiFID II either?  Attend the FTF Navigating the Maze of MiFID II event on Sept. 18th to get answers and collaborate with peers. 

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