The paper examines the challenges for firms of understanding how MiFID's new concepts and terminology will work in practice. In particular it examines practical issues around a firm's execution policies; the methods for achieving best execution for different clients and markets; and how firms will monitor and review these policies and arrangements.

It also presents, for further discussion with industry, an additional option for providing best execution in dealer markets, based on the use of benchmarks. This draws on research and analysis commissioned from IBM Business Services, who are also publishing their report.

Best Execution and Article 21 of MiFID

The directive introduces the principle that financial services firms carrying out transactions on their clients' behalf:

" must take all reasonable steps to obtain the best possible result, taking into account price, costs, speed, likelihood of execution and settlement, size, nature or any other consideration relevant to the execution of the order."

The requirement is broadly in line with proposals set out in CP154 but the directive also introduces several processes for firms to ensure compliance with Article 21 which include:

establishing an execution policy, which must contain information on the venues firms used to execute client orders. Those venues must allow it to consistently obtain the best possible result for execution for their clients;
disclosing the policy to clients and obtaining their consent to that policy;
monitoring the effectiveness of arrangements in order to identify and correct any deficiencies and review the appropriateness of the venues in its execution policy at least yearly; and
upon client request, being ready to demonstrate that the client's order has been executed in line with its execution policy.
The discussion paper forms part of the FSA's ongoing commitment to discussing policy with the industry and engaging our stakeholders in constructive dialogue ahead of our formal consultation process for MiFID.

The last date for submission of feedback on this paper is 17 August 2006. The feedback will inform the FSA's approach to implementing MiFID Article 21 and the draft proposals for implementation will appear in the consultation on Reforming Conduct of Business Regulation in October 2006.Download the document now 657.9 kb (Adobe Acrobat Document)