Trade and Execution FAQs About MiFID II

September 21, 2017

The following MiFID II FAQs will attempt to clarify some of the key issues surrounding trade and execution obligations.

This page is intended to be continually edited and updated as and when new questions are received. The date on which the page was last amended is included for ease of reference.


Best Execution

Record Keeping of Orders and Transactions

Clock Synchronisation

Trade Reporting

Trade Confirmations

The Systematic Internaliser (SI) Regime


Best Execution

What are the main changes to the requirements for best execution under the MiFID II regime?

  • Article 27 (1) for best execution replaces the word ‘reasonable’ with ‘sufficient’. Firms must take all sufficient steps to obtain the best possible result, when executing client orders
  • Firms that do not execute, but ‘receive and transmit’ or ‘place orders with other entities for execution’, are obliged to ‘act in the best interests of the client’, and now must also take all sufficient steps to obtain the best possible result for the client
  • MiFID II introduces a new requirement for investment firms that execute client orders. This new requirement is known as ‘RTS* 28 – Annual Top 5 Publication’
    • The annual publication must show a summary of the top five venues where client orders were executed and the quality of execution obtained on those venues
    • A summary table must be displayed, indicating what percentage of orders that were placed onto order books, were passive, aggressive or directed
    • Firms must also indicate the percentage of orders directed to a particular venue by their client
    • This data must be in a machine readable format for downloading by the public
  • Firms that do not execute client orders, but receive and transmit orders or place orders with other entities for execution, are still required to issue an annual publication. These firms must publish the top five entities used (as opposed to execution venues used), to which they transmitted or placed orders with. They must also summarise the quality of execution obtained
  • MIFID II requires execution venues, market makers (MMs) and systematic internalisers (SIs) to publish execution reports as stipulated in RTS 27

*Regulatory technical standards

What are Pershing's obligations for MiFID II best execution?

  • As an executing broker, Pershing Trading Services (PTS) will be required to publish its annual top 5 publication on the Pershing website. It must be in a machine-readable format and be made available for downloading by the public
  • This annual publication must show a summary of Pershing’s top five execution venues and brokers used in the preceding year, by percentages for both consideration, and order count for each venue/broker
  • Pershing will have to provide statistics on the type of trading it executed on all five venues by way of showing the percentage splits on orders that were passive, aggressive, or directed
  • For Pershing to comply with MiFID II, we must perform an annual publication on all financial instruments that are in-scope of the best execution regime. PTS will therefore perform an annual publication for its main traded asset classes; equities, exchange traded funds (ETFs), investment trusts and fixed income

Does ESMA make any distinction in the Best Execution regime between investment firms or portfolio managers that “Receive and Transmit / place orders with other entities” versus “executing orders themselves”?

Yes. The recent ESMA guidance on investor protection states: “in order to comply with the requirement under Article 24(1) to act in the best interests of its clients, a firm should consider transmitting client orders instead of executing them itself where that would deliver a better result for clients, provided the firm is authorised for reception and transmission of such orders.

Similar analysis and assessments should be undertaken by portfolio managers or receivers and transmitters of orders that intend to send orders to a single entity for execution.”


Record Keeping of Orders and Transactions

What are the current requirements for record keeping of orders and transactions under the MiFID I regime?

Firms are currently required to keep records in a significant number of areas, including:

  • Client orders
  • Decisions to deal
  • Transactions (both where executed by a firm or passed to another to execute)
  • Client files (including client agreements, information to assess suitability)

The records are required to be kept for a period of five years or for the duration of the client relationship (if longer).

What are the new requirements for record keeping of orders and transactions under MIFD II?

Investment firms are required to keep at the disposal of the competent authority, for five years, in a readily available manner that cannot be modified or deleted, all relevant data relating to all orders, and transactions, carried out on behalf of clients, or on own account.

  • Investment firms shall arrange for records to be kept of all services, activities and transactions undertaken by it, which must be sufficient to enable the competent authority to fulfil its supervisory tasks and to perform the enforcement actions under MiFID II
  • The new record keeping rules expand upon the existing MiFID I regulation, in terms of having to add extra fields and data for both orders and their subsequent execution
  • There is a new requirement to record a log of all events that occur within the life time of an order, such as price; quantity or instruction
  • Any changes to an order, whether it trades or not, must be recorded as a ‘reportable event’
  • All of the ‘reportable events’ must be timestamped in accordance with the MiFID II clock synchronisation obligation

Which firms will be impacted by the MiFID II record keeping of orders?

All firms, whether they trade through Pershing Trading Services or not, will be impacted.


Clock Synchronisation

What are the changes to the clock synchronisation requirements under MiFID II?

  • MiFID II requires firms and venues to timestamp events accurately and synchronise their clocks to Coordinated Universal Time (UTC)
  • MiFID II also places a max divergence requirement, meaning firms have to monitor and correct any instances of clock drift from the desired synchronisation
  • For firms that are conducting high frequency trading (HFT), the levels of timestamp granularity start at ‘one second’ granularity, and go to ‘one microsecond’ granularity
  • RTS 25 details the types of trading activity by member firms, and the required timestamps depending on the type of trading activity involved. The types of trading activity ranges from activity on ‘Voice Trading Systems’, to ‘Request for Quote Systems’, and through to HFT
  • For investment firms that trade as non-members, the standard requirements are a timestamp that is synced to UTC in seconds

What are the changes to the clock synchronisation requirements under MiFID II?

PTS engages in many different types of trading activity and therefore has varying levels of clock granularity to satisfy the MiFID II obligations. Pershing's clock synchronisation obligations will apply when PTS trades:

  • With Retail Service Providers (RSPs) and Exchange Traded Fund (ETF) Market Makers on a ‘Request for Quote’ basis, using various systems
  • Telephonically where negotiated trades are concluded
  • Global equities on an electronic basis, as part of our DMA solution
  • As both a member firm, and on occasion as a non-member firm, depending on the financial instrument being traded and in which country


Trade Reporting

What are the changes to the requirements for trade reporting under the MiFID II regime?

The current MiFID I regime for trade reporting is changing significantly.

  • Under the current regime, buy-side firms rely on their sell-side counterparts to publish trade reports for over-the-counter (OTC) trades. Under MiFID II, the obligation is firmly on the executing seller, irrespective of who they are
  • If an over the counter OTC trade is executed between two investments firms, outside a trading venue (or outside the rules of a trading venue), it will be the responsibility of the firm that sells the financial instrument to make the transaction public through an Approved Publication Arrangement (APA)
  • Equity trades must be reported as close to real-time as technically possible, but at least within one minute
  • Fixed income trades must be reported within 15 minutes
  • The only time where an investment firms is the selling counterparty in an OTC trade, and does not have to send a trade report to an Approved Publication Arrangement (APA), is if they are selling to a systematic internaliser
  • For all trading that occurs on trading venues, such as primary exchanges, MTFs or OTFs, the trade report is currently automatically published by that venue. This presents no change from the current MiFID I regime
  • Pre and post trade transparency is being introduced to the fixed income market

What are Pershing's trade reporting obligations under the MiFID II regime?

  • MIFID II introduces ‘The Trading Obligation for Shares’ (MiFIR II Article 23) for equities. This new piece of regulation forces executing brokers like PTS, when executing orders in equities, to trade as much as possible on trading venues, such as an exchange or MTF, with systematic internalisers, or an equivalent third country trading venue. Therefore there will be limited instances when Pershing will trade equities on a pure OTC basis
  • Under MiFID II, firms can continue to trade equities on an OTC basis; however this must be non-systematic, ad hoc, irregular and infrequent. ESMA is yet to confirm the description of what ad hoc or irregular actually means, therefore this is currently open to interpretation

What is an APA?

Approved Publication Arrangement (APA) is a person authorised under the provisions established under MiFID II to provide the service of publishing trade reports on behalf of investment firms.

APA’s are designed to provide services to an investment firm in order for it to meet its obligations under Articles 20 and 21 MiFIR. APAs did not exist under MiFID I. Article 20 MiFIR states that, “investment firms which, either on own account or on behalf of clients, conclude transactions in shares, depositary receipts, ETFs, certificates and other similar financial instruments traded on a trading venue, shall make public the volume and price of those transactions and the time at which they were concluded. That information shall be made public through an APA”.

What is the MiFID II trade reporting impact to Pershing’s clients?

  • Pershing clients which have execution permissions, and those who face off directly against market counterparties when executing client orders, will have an obligation to report to an APA if they are the selling counterparty, in a pure OTC trade, with another market counterparty
  • Pershing clients which receive and transmit or place orders with PTS do not have an obligation to send a trade report to an APA for orders that are transmitted to us to execute. Therefore, clients will not have to build a connection to an APA, as PTS would be the executing broker, and therefore would have the obligation to report any OTC trades where it is the executing selling counterparty

What is Pershing doing to prepare for MiFID II trade reporting?

Under MiFID II, PTS will be connecting to an APA. As an executing broker, we will be sending seller trade reports each day, on a multi-asset class basis.


Trade Confirmations

What is changing to client reporting under MiFID II?

MiFID II brings enhancements to the investor protection regime, and overhauls the way firms communicate with their clients for various services provided. There is a new requirement for investment firms to provide clients with ‘adequate reports’ on services provided. Importantly, this new requirement now extends to include reports to professional clients.

What is the impact to Pershing?

Under Article 59 (1) investment firms having carried out an order on behalf of a client, other than for portfolio management, shall, in respect of that order:

  • Promptly provide the client, in a durable medium, with the essential information concerning the execution of that order
  • Send a notice to the client in a durable medium, confirming the execution of the order as soon as possible and no later than the first business day following execution or, where the confirmation is received by the investment firm from a third party, no later than


The Systematic Internaliser (SI) Regime

What is a systematic internaliser?

Systematic Internaliser’s (SI’s) are defined as:

‘Investment firms, which on an organised, frequent and systematic, and substantial basis, deals on own account when executing client orders outside a regulated market, an MTF or an OTF, without operating a multilateral system’.

  • The current SI regime is extended under MiFID II. Under MIFID II, ESMA has stipulated clear thresholds for both order counts, and traded value, for own account trading, that if crossed, will mean an investment firm will become an SI for that particular instrument
  • For fixed income, the investment firm shall become an SI for a class of bonds that a particular bond belongs to
  • When a firm becomes an SI, they have an obligation to make public firm quotes, in respect of the instrument(s) they are registered as an SI in

Please note: Systematic internalisers should not be confused with market makers. These are both separate categories of investment firms.