RTS 28: More to Compliance than Meets the Eye

Traders Magazine Online News, August 18, 2017

John Jannes

In April of 2018 European investment firms will be required to publish their first ever disclosures about quality of trade execution, under the guidance of MiFID II’s RTS 28. At first glance, one might conclude that ESMA has attempted to make the task achievable by limiting the scope of the disclosure to documenting the top five trading venues used by an investment firm. Indeed, for small firms with uncomplicated trading, compliance with the rule will be relatively straightforward, but as a firm’s activity increases in complexity, so does its reporting obligation.

Broadly speaking, a firm must be prepared to extract the relevant trade data from their order management systems, categorize customers and trading activity to determine the appropriate reporting templates, compute the reportable statistics, format the data to the mandated human and machine readable formats, add statements summarizing their analysis of execution quality, and finally place the end products on a public website where anyone can view and download them.

There are several aspects of the rule that can potentially create a logistical headache for an investment firm, not the least of which is simply the broad scope of asset classes that are covered by RTS 28. ESMA has identified 22 asset classes that must be individually reported, spanning equities, debt instruments, OTC derivatives, structured products, emissions credits and even a category mysteriously called “other.”

Creating reports for one or two asset classes might be straightforward, but pulling trade records from multiple order management systems, extracting the relevant data points, computing the statistics and then formatting them to a standard template becomes a very time consuming endeavor when extended to a greater breadth of trading activity. To complicate matters, there are asset class sub categories, which are to be used on a best efforts basis in 2018 but will be required in 2019, further adding to the number of reports a firm needs to publish.

The next complication arises from the multiple layers of trade classification required for compliant reporting. Beyond asset class, trades need to be classified by customer type – retail and professional customers must be reported on separate but otherwise identical tables. Then things become more complex. An investment firm must also classify orders based on attributes of the orders themselves and document when the investment firm acted as an executor of an order or as a receiver and transmitter of an order. A firm is deemed to have acted as an executor when it accessed liquidity on a venue directly and to have acted as a receiver and transmitter of an order when it sent a customer order to a third party for execution. Two different reports are required for documenting when a firm acts as a receiver/transmitter and when the firm acts as an executor, with additional data requirements depending on instructions placed on the orders themselves.

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