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The Futures and Options Association (FOA) urges the FSA to copy-out MiFID’s “principles-based” approach to best execution and allow firms the discretion to determine the process and the factors relevant to measuring the quality of execution in dealer markets. It also challenges the primacy given by FSA to price “benchmarking” as a preferred methodology when there are more appropriate means of measuring price in certain markets.
The FOA’s position is the result of consultation with its members and is supported by a study commissioned by it from KPMG for the purpose of responding to the FSA’s Discussion Paper (DP06/3)on the subject. In its report, KPMG observes that, firstly, price is only one of the several key factors that need to be taken into account when determining the quality of execution and that, while benchmarking can be used to measure price in the more centralised and standardised (particularly equity) markets, it supports the industry view that other methodologies are likely to be more appropriate for the quote-driven and structured products markets (eg. complex OTC derivatives).
Anthony Belchambers, Chief Executive of the FOA and Chairman of MiFID Connect, said “The KPMG report demonstrates clearly that, while price benchmarking has a part to play in some markets, there is no single approach to Best Execution that suits all markets; and, in line with MiFID’s principles-based approach, what is ‘best’ should be judged by a firm in the context of the client’s objectives and the type and state of the market at the time of the transaction. I do not doubt FSA’s commitment to “intelligent copy-out” of MiFID, but if UK regulated firms are to meet the current very tight timetabling for implementing MiFID on time, it is essential that the FSA adopts a very focussed and disciplined approach to transposition and allows the firms to concentrate their resources on implementing the essential and necessary requirements of the Directive. The debate about price benchmarking in dealer markets has been an unfortunate distraction to this core objective”.
Nigel Harman, head of Corporate and Investment Banking at KPMG, said “We approached the question of Best Execution by considering the points of view of a variety of market participants, including firms on the buy-side and the sell-side. We found a striking consistency of view in our discussions with our clients and other market firms: a workable outcome would allow a combination of approaches to demonstrating best execution, including the use of reliable benchmarks where they are available. We also believe this outcome would be consistent with the objectives of MiFID. We hope the report reflects the strong alignment of views and will contribute to the dialogue between market and regulator”.
