FIX Trading Community, which sets the messaging standard for trading messages sent between buy-side and sell-side firms, has published the final Recommended Practices for Best Execution Reporting, ahead of MiFID II’s January 3 implementation date.
The report provides guidance on how to populate the reports required under MiFID II, addressing the three main reporting requirements: II RTS 27, RTS 28, and article 65.6 with the appropriate data in a compliant and consistent manner.
The obligations, however, have proved to be less than simple, with the instrument traded and the role of the firm and liquidity provider among the factors that need to be considered.
“At the outset it looked like a relatively straightforward process, until we realised that, depending on the asset class traded and where you are in the workflow, it’s really not straightforward at all,” says Alex Wolcough, director at Appsbroker and co-author of the report.
The report detailed six scenarios which are likely to occur within bond trading, which are broken down into the buy-side’s activity directly with one sell-side firm; via a ‘second’ firm; on a regulated market (RM), multilateral trading facility (MTF), or organised trading facility (OTF); or through a dealer-to-client (D2C) trading venue.
In scenarios involving a buy-side firm requesting a quote from the sell-side executing off its own book, the buy-side and sell-side must produce an RTS 28 report identifying the sell-side as one of the top five execution venues, if it qualifies. The sell-side firm must also include this in an RTS 27 report, which the trading venue must also generate.
This will be the case even if ‘sell-side 1’ uses another bank to find liquidity; the sell-side 1 is considered an eligible counter-party and is therefore, if applicable, identified as one of the top five execution venues. The ‘sell-side 2’ is only obligated to provide an RTS 27 report.
If, however, the sell-side 1 does not hold a position in the security and passes the sell-side 2 quote straight through to the buy-side, this is seen as a trade between the sell-side 2 and the buy-side. In this case, the sell-side 2 must generate both an RTS 27 and 28 report, identifying itself as a top five venue in terms of trading volume. Sell-side 1 must produce an RTS 28, and identify the second sell-side firm as a top five venue in an RTS 28 report, and the buy-side is obligated to produce a report under Article 65.6 identifying sell-side 1 as a ‘top five broker’, if applicable.
When involving an RM, MTF, or OTF, the buy-side must again report under Article 65.6, as with the previous scenario. The sell-side does not produce an RTS 27 report since it does not hold a position and is not a liquidity provider, however if applicable, must identify the trading venue as a top five execution venue, which is also required from the venue itself.
In the case of trades through D2C venues, whether accessing liquidity from multiple or a single provider, the venue is identified in the buy-side’s RTS 28 report as one of the top five execution venues if it qualifies, not the dealer. In the case of multiple providers, the trade is electronically confirmed via FIX Message before execution. The sell-side, not dealing directly with clients, does not produce a report, and the trading venue is obliged to generate an RTS 27 report.
The report is the product of two years of working committees and regulatory input and can be utilised by all venues and firms set to execute, receive and place orders for execution.
“We’ve got industry agreement, not only on the FIX Trading Community level, but also, in the majority of cases, across associations, and we believe we’ve got a document that is sending people in the right direction.”
A notable absence in the guidance, however, is the feedback on a buy- to buy-side trade, which data shows is becoming a main source of liquidity in fixed income trading.
These trades do have a level of involvement on venues, to show that the trade has been executed, however capturing a standardised process of the buy-side to buy-side cases was not as straightforward as buy- to sell-side scenarios.
The workflows involving exclusively buy-side firms proved to be complex and varying in their specifics, meaning that presenting a general solution to these ‘edge cases’ proved difficult to do, according to Wolcough.
Potential for guidance on these trades cannot be ruled out, however, with the report’s co-author expecting changes in the best execution reporting guidance and development in the standards and working practices post-implementation.
“The working group will continue to update the document, which will include new workflows when there’s a level of standardisation that we can capture.”