How does one define “best execution” for FX Trading Firms under MiFID II?

While some industry sources are arguing whether or not MiFID II will dramatically affect the FX industry, most FSA and CySEC licensed FX brokers are rapidly adjusting policies in order to comply with the new requirements. 

One of the key changes of MiFID II is an implementation of the term “best execution” and a directive to ensure “All Sufficient steps” (Article 64 -4) are in place to support that. 

As stated in (104): {As best execution obligations apply to all financial instruments, irrespective of whether they are traded on trading venues or OTC, investment firms should gather relevant market data in order to check whether the OTC price offered for a client is fair and delivers on best execution obligation}.  “Best Execution” will apply to the FX Industry. 

What is the best execution and how one can comply with that? 

Section 7, Article 65 provides clarity on that term:  “price, costs, speed, likelihood of execution and settlement, size, nature or any other relevant consideration.”

It is clear from this statement that "Best Execution" does NOT simply mean best spread. FX Trading Firms will be required to evaluate fill ratios, speed of execution as well as counterparty backgrounds. I highly doubt, therefore, that non-licensed, or offshore "quasi" Liquidity Providers with questionable corporate structures and histories, will be able to pass MiFiD checks. 

 What could that mean for the FX trading firms? 

  • Proof of access to a reliable price feed and Depth of Market (see an example here

 (Businesses operating a non-agency model must back up the logic behind the provided quote (123-124),

  • LPs and Technology (Bridge or Aggregators per se) Comparison as an ongoing effort to secure the best terms for the end client (see an example here) - (107), 
  • More complex due-diligence of Liquidity Providers/ Liquidity Sources due to the MIFID II requirement to disclose execution venue (Article 66- 3b). 

Please note that this is NOT a legal opinion. 

High-impact MiFID II Changes:

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