‘Best Execution’ – The Long and Short of it!
The concept of the duty of ‘Best Execution’ has been around for many years especially when applied to the broker dealer community and their fiduciary responsibility to their clients. All stakeholders in the Securities Finance eco-system are feeling this pressure. Through industry regulation like MiFid II (https://www.esma.europa.eu/databases-library/interactive-single-rulebook/mifir/article-27), emanating from the EU, the concept is being widened to apply to all investment managers subject to its governance. Furthermore, greater globalization of such measures has meant that other regulators, such as the SEC, are issuing guidance notes and associated regulation (https://www.sec.gov/info/smallbus/secg/regulation-best-interest#Disclosure_Obligation) that are pointing in the future direction of a ubiquitous mandating of rules. In fact, best execution is one of the key examination priorities of the SEC in 2020 as it was in 2019. (https://www.sec.gov/files/OCIE%20Risk%20Alert%20-%20IA%20Best%20Execution.pdf). While many firms are not currently subject to best execution rules, they still feel the client pressure and are beginning to understand the marketing positives to be obtained from having such a policy in place.
The essence of having a policy of ‘best execution’ is to have data supporting it. In the Capital Markets arena, as the regulatory mandates of SFTR come into force, Securities Finance participants and service providers are increasingly seeing the need and benefits of having the necessary data to prove best execution. Given the greater awareness by clients, the demand for a fiduciary service with all that it entails has become a ‘must have’ notwithstanding whether it is a legal requirement….yet. On the sell-side of the market, several data suppliers are able to provide EOD pricing of securities lending transactions with some offering intraday capabilities. On the buy-side, Hazeltree’s Data Insights solution is uniquely positioned to offer this service covering both long and short lending and borrowing transaction data and metrics.
The benefits of having a ‘Best Execution’ type approach are manifold.
- From a compliance and good governance perspective, both internally and externally, it is assumed that every transaction is undertaken at ‘best’ and the demand is there to have it proven.
- Using the same data that confirms best execution, can also lead to identifying opportunities for taking positions, ensuring most beneficial rate is earned or paid on new positions, and enhancing revenues and efficiencies on existing positions.
- From a relationship standpoint the existence of an independent best execution check is a key marketing positive with new and existing clients.
We are working in a time when regulations are proposed, discussed, sometimes delayed and then implemented. It is very easy to succumb to the notion of putting off what does not need to be done today in the hope that it will be delayed or go away. In the case of ‘Best Execution’, the benefits and advantages accrue even without a regulatory compulsion and any avenue that provides the requisite data to fulfill the securities financing element of the concept should be grasped as soon as possible.