Achieving best execution of FX trades

AS EUROPEAN regulatory authorities move to regulate the execution of trades in other financial instruments, forex still operates outside of these regulations. But does it need to be regulated in order to achieve improved execution?

The European Commission will today publish a proposal for a review of the Markets in Financial Instruments Directive (Mifid 2), which will extend the reach of the original directive. Forex trades are unlikely to be affected by the new rules. But should there be a best execution requirement in FX? Or indeed, is a best execution requirement possible? Commissioner Michel Barnier will present the Commission’s proposals on the review and the Market Abuse Directive at a press conference in Brussels at midday.

The original incarnation of Mifid created a pan-EU regulatory framework. And today’s revision is unlikely to be a case of dotting the “i”s and crossing the “t”s: “Mifid 2 is no light-touch amendment to the existing Mifid requirements,” says Harry Eddis, counsel at global law firm Linklaters. “Along with Emir, Mifid 2 (and Mifir) as currently proposed, looks set to introduce significant changes to market infrastructure in the EU that could radically affect the way investment firms do business.”

Originally, Mifid concentrated mainly on equity trades. However, the new legislation will be much more concerned with other instruments, such as commodities, bond trading and OTC derivatives.

DEFINING FX BEST EXECUTION
Broadly speaking, best execution in FX is not simply a case of best price. On the buy side, firms seeking best execution will look to the total cost of the trade – to execute, allocate and settle that trade as well as the operational risk in movement of cash between counterparties.

The question also arises as to who a best execution regulation would apply to. “There are so many different people within the forex sphere,” says Toby Corballis, chief executive of Rapid Addition. “Point to point traders, people arbitraging across exchanges or people changing money to go on holiday.” Corballis adds that while a forex regulation may be included in today’s review, it is unlikely. “Such a regulation would be very expensive and difficult to implement.”

To say that there is no directive on best execution is not to say that policies do not exist. “The ability to achieve best execution in the FX market is not a recent phenomenon,” says Mark Warms, general manager for FXall. “Indeed, the tools and technology which help FX market participants to implement best practice processes have been available for a number of years.”

The bottom line is that best-execution is something that clients want. And with this demand, there is industry pressure to achieve this end, without the requirement for regulatory heavy-handedness.