Fortunately, innovative and collaborative solutions can allow fund and asset management houses to not only meet but stay ahead of the regulatory curve.
We see best execution not just as an outcome, but as an aspiration; one which encompasses arrangements and processes designed to secure the best outcomes for clients with pre and post-trade monitoring to assess ongoing effectiveness, and with clear and concise reporting to deliver confidence, trust and transparency.
Delivering best execution
By this measure, best execution has to be at the very heart of any brokerage in the retail space. The question for asset managers is whether running a retail trading desk is core to their business. If they believe it is, they must be able to answer the following questions: Do current broking processes benchmark across multiple venues? Are best execution outliers also being monitored regularly, and is that feedback being communicated by brokers?
Best execution outliers are often down to operational factors, and these need to be assessed consistently across multi-venue benchmarks. Under Mifid II, the directive, requires trading venues, market makers, and other liquidity providers to evidence that they have taken “all sufficient steps” to obtain the best possible results for the client when executing orders.
These are just the present concerns. Growing considerations include whether trading desks have the expertise to be more proactive in the future to fully facilitate illiquid stocks, for example in the AIM market and how to achieve and evidence best execution in fixed income and OTC markets when there are no reliable benchmarks. Best execution is also about strong governance, which means multiple lines of defence. The first line of defence must be the business, which involves real time monitoring as well as internal committees at a management and Board level. This means rigorously assessing existing risk control frameworks and ensuring they provide enough challenge.
Collaboration opens up new possibilities
Failing to deliver best execution violates the fiduciary obligation of the investment manager, attracting significant fines and reputational risk. Is it realistic to take on the burden of ensuring the optimum delivery of best execution, while concerns around speed of settlement, market impact and liquidity begin to converge with the new regulation?
There are also significant costs for updating the necessary architecture that must be considered if firms are serious about bridging the technology gap. The good news is that asset managers who feel best execution is non-core to their business can engage in a collaborative solution and outsource their dealing to best-of-breed providers.
Outsourcing can bring a synergistic effect, where access to execution tools and cutting-edge technology can deliver unrivalled best execution propositions, allowing a firm to streamline operations and create new value opportunities for existing resources. The increase in efficiencies created from outsourcing dealing functions can dramatically reduce costs, allowing a business to pass these cost reductions on to the end client.
Ultimately, outsourcing should create a best-of-breed partnership where a firm benefits from cutting-edge best execution service at the vanguard of new technologies.
Collaborating to evolve technology and improve efficiencies can help the industry rise to regulatory challenges. As firms rush to comply with Mifid II, there will be tactical fixes to issues such as best execution, but asset managers need to consider the shape of the regulation and gear up to create longer-term solutions. Acting alone can bring heightened risk and costs, while collaboration opens up new possibilities, efficiencies and improved client outcomes.
