Regulators To Turn Up Heat On RTS 27 Reporting

January 23, 2019

Aquis Exchange Working On Tool To Help Make Sense Of Data

MiFID II has just celebrated its first birthday and market participants are still coming to grips with RTS 27 and the Best Execution requirements. The first half report card was not encouraging although progress, albeit slowly, is being made. However, market participants will have to pick up the pace as regulators will certainly be bearing down this year.

A Cappitech study published last November revealed the extent of the unpreparedness. It showed that 56% of the 100 European buy and sell-side compliance executives canvassed who were legally obliged to produce RTS 27 Best Execution reports did not do so. Meanwhile almost 60% had no plans to use their Best Execution reports internally, even though the data would improve their execution quality, client offering and ability to make better informed business decisions.

Moreover, nearly two-thirds or 65% of respondents did not monitor trades systematically according to best execution criteria despite tools such as transaction cost analysis being widely available.  Many firms had not yet defined their best execution policies properly and those that had did not have a system to monitor their policies, according to Ronen Kertis, CEO of Cappitech. “That wasn’t due to a lack of TCA products in the market, but because those products were designed to cater for the larger players that can invest a lot of money in the implementation of those tools, and are happy to pay,” he adds.

Kertis was not surprised about the results and noted that there has been a marked improvement in the past three months. “The message was loud and clear that many companies were not submitting their reports but the study was conducted in July – just after the first reports were due. However, the numbers have increased and most companies have published the reports since our study although it is still not 100%.  It is still difficult though for them to make sense of the data and make comparisons.”

Bobby Johal, consultant at ACA Compliance also thinks more work needs to be done to iron out the problems. “The regulation is still brand new and the conversations are fresh,” he adds. “Many buyside firms continue to speak to their counterparts to get more information and flesh on the bones because the RTS 27 has not delivered the benefits. There is a lack of uniformity and inconsistencies in the way venues are publishing their data, differences in interpretation, as well as a lack of clarity and standardisation.  These challenges can make it difficult to aggregate and analyse RTS 27 data.”

Aquis Exchange has been concerned about the quantity and quality of the data RTS 27 required ever since the plans were circulated. “We anticipated the industry could experience problems in trying to make sense of the vast amount of data and whether it would be possible to draw any meaningful conclusions from it,” said Graham Dick, Head of Sales and Business Development at Aquis Exchange, “and we decided to act.”

Aquis recruited a dedicated data analyst to work on the task of standardisation as many of the RTS 27 reports needed to be worked on in order to achieve any readability of the tables. For specific analysis to begin, the data needed to be in the same format, then inputted into a database, requiring the use of scripts. Once all the data was collated, due to its extensive size, a conscious selection was made of the most useful statistics and then analysed.

“The picture that has emerged is absolutely fascinating,” Dick said. “Aquis will shortly be unveiling its findings and hopes to be in a position shortly to make its analytical tool available to the public.”

Transparency is the name of the game and the driving force has been to improve client outcomes as well as enhance the robustness of the Best Execution processes. The compliance bar was raised significantly when the regulator changed the wording to firms having to demonstrate all “sufficient steps” in achieving best execution from the ‘reasonable steps’ expected in the MiFID I iteration.

“Although we understand the debate in the industry around the choice of metrics and timeframes stipulated by ESMA in RTS 27,” Dick added, “Over time these RTS 27 statistics will provide good transparency for the buyside to objectively analyse their use of execution services and the quality and cost of the trading venues they access to transact for their clients. This transparency should help to identify where good quality liquidity is not being efficiently accessed to the detriment of the end client.”

While market participants have been allowed breathing space, the informal grace period is coming to an end for many of the new regulatory regimes, according to the Deloitte Centre for Regulatory Strategy’s 2019 EMEA Outlook. It states that supervisors will be casting their eyes on implementation of existing regulation with MiFID II and Best Execution at the top of the list.  A particular focus will be on how firms are using increased data in equities and fixed income to enhance Best Execution.

Perfunctory efforts will no longer be tolerated and firms will be expected to report in a more detailed manner on their usage of quarterly RTS 27 data due in April 2019. As the Deloitte report notes “While last year’s reports were on a best efforts’ basis, already they have shown that many firms execute via closely‐linked parties or with a small number of brokers per asset class. Firms should review the execution venues they use regularly and consider any unexpected trends, and analyse competitors’ reports.”

Separately, the Financial Conduct Authority is also turning up the heat. The UK watchdog has long been a proponent of improving the Best Execution process for the end user. It first conducted a thematic review of firms’ Best Execution practices in 2014 and expressed apprehensions about the level of compliance. Three years later, it reiterated its concerns and “it is very likely that there will be further supervisory initiatives in this area over the course of 2019,” says Johal.  

“Firms should be more thoughtful in how they evaluate and leverage the data in their execution process. At the very least, they should familiarise themselves with the reports of their trading counterparts and comparable peers and incorporate discussion of the detail within the appropriate internal forums such as Best Execution committees,” he adds.

Perhaps the new Aquis analysis will be just what they need to put before these committees. 

by Lynn Strongin Dodds