The value of RTS 27 and 28 reports have long been questioned by firms and market participants. Many investment firms have also deemed any meaningful data drawn from the reports as disproportionate to the difficulty and costs incurred to produce them. Following these concerns and the suspension of the obligation to publish RTS 27 reports earlier this year, ESMA has produced a Consultation Paper outlining suggested improvements to the current best execution reporting framework whilst the UK’s FCA has abandoned the reporting requirements entirely.
ESMA’s Latest Position on RTS 27 and RTS 28
ESMA published the EU MiFID II Quick-Fix Directive on 26 February 2021 to introduce atwo-year suspension of publishing quarterly RTS 27 reports effective from 27 February 2021 until 28 February 2023. The EU Member States were required to comply with the Directive, and adopt and publish the necessary laws, regulations and administrative provisions by 28 November 2021 and apply the relevant measures from 28 February 2022. The current status for each country and associated implementing documentation can be viewed here.
Where the transposition is not done, ESMA expects NCAs of the Member States not to prioritise supervisory actions towards investment firms’ obligation to publish RTS 27 reports.
ESMA, in a recent Consultation Paper, identified a lack of consistency in RTS 27 reports due to cumbersome technical factors as well as the high volume of data included in the reports. As a result, any effective use of the data by firms and other market participants has been minimal. Therefore, ESMA proposes to make the following improvements, including:
- transforming the detailed, raw data-oriented style of reporting into a simpler version that provides information of higher added value (i.e. improved analysis and use of this data) on investment firms’ execution quality;
- reducing the quantity of information required under RTS 27 by introducing proportionate reporting requirements (i.e. focused on key features of order execution, such as direct and indirect costs) and reducing the report from 9 tables of information to 2 tables; and
- avoiding overlaps and ensuring consistency with the post-trade transparency reporting requirements under MiFID II/MiFIR to reduce the costs of best execution reporting.
ESMA also proposes to introduce a few changes to RTS 28 to make the content of these reports more meaningful for the public and market participants to enhance investor protection. The changes include:
- the deletion of firms’ obligations to report the percentage of the executed orders that were passive and aggressive orders for their top 5 execution venues;
- a new obligation for firms to explicitly confirm in their summaries of execution quality if they do not report on the required parameters and to briefly explain why they did not provide this information; and
- the inclusion of information on received payments for order flow (PFOF) in the summary on the firm’s achieved execution quality to assist investors in the choice of a firm for their order execution.
Despite the temporary suspension of RTS 27 reports, RTS 28 reporting requirements are still in force for EU investment firms. The annual report must be published by 30 April each year to cover the full period of the previous year. Investment firms are required to summarise and publish their top five execution venues in terms of trading volume and information on the quality of execution obtained for each class of their financial instruments. Although often grouped together with RTS 27, for now they need to be clearly distinguished.
FCA’s Latest Position on RTS 27 and RTS 28
On 30 November 2021, the FCA announced the permanent removal of the RTS 27 and 28 reporting requirements which took effect on 1 December 2021 in a Policy Statement. This was one of the first major divergences from ESMA requirements (noting above that ESMA appears intent on modifying the requirements rather than abolish them entirely).
The FCA had noted concerns that the reports fail to provide any significant value to the market and to consumers in addition to the burden involved in producing these reports.
What should you consider now?
Whilst the reporting requirement of the RTS 27 reports is suspended until 28 February 2023 for EU investment firms and potentially the end of 2021 for UK firms, completing the reports internally remains of value, particularly as it addresses the continuing requirement to monitor:
- time to execute; and
It also encourages investment firms to rectify any deficiencies that the monitoring may expose.
Nevertheless, the best execution obligation under MiFID II is not suspended so investment firms remain obliged to provide the best available terms for the execution of client orders considering a combination of factors:
- likelihood of execution;
- settlement size;
- settlement nature; and
- any other relevant consideration.
How can TRAction help you?
We understand that the preparation of RTS 27 and RTS 28 can be difficult. That is why TRAction provides complimentary assistance preparing RTS 27 and RTS 28 for those signed up to our best execution monitoring services. Our best execution monitor is designed to help you comply with your best execution obligations as mentioned above.
If you need assistance with developing your RTS 27 or RTS 28 reports or wish to discuss this article with us, please do not hesitate contact us.