Providing the best execution available is an obligation of trading services providers to their clients. However, this is not legally binding in most jurisdictions. And, Singapore is going to change that.

The Monetary Authority of Singapore (MAS) issued a notification earlier that will mandate all the capital markets intermediaries to provide the best execution to their customers from March 3, 2022. Currently, there are no formal best execution requirements in place for firms in the Asian city-state.

Sophie Gerber, TRAction Fintech
Sophie Gerber, TRAction Fintech

“Capital markets service license holders, banks, merchant banks and finance companies that conduct certain regulated activities (Capital Market Intermediaries) are subject to the Best Execution requirements,” Sophie Gerber, a Director at Sophie Grace and TRAction Fintech, explained.

“They must implement policies and procedures to execute customers’ orders on the best available terms.”

A New Regulatory Concept

But, what exactly is Best Execution? Well, it legally mandates financial service companies to provide the best available terms of order execution for their clients. It is, however, a relatively new concept in the regulatory regime. Its primary goal is to bring transparency of execution and a higher level of disclosure in transactions.

The upcoming rules are in line with the European regulatory requirements under the MiFID II around best execution that came into effect at the beginning of 2018. Then European firms had an 18-month window to develop policies and procedures for offering the best execution to their customers.

Additionally, MAS provided a generous window to the Singapore-based Capital Markets to prepare its policies and procedures as it first communicated its decision in September 2020. “The Notice formalizes MAS’ expectations of Capital Market Intermediaries (CMIs) in respect of Best Execution policies and procedures,” Gerber said.

But, not every regulator agrees with the benefits of having the best execution rules. The Australian Securities & Investments Commission (ASIC) earlier decided to bring such best execution rules but excluded them in its final product intervention order.

Coming to MAS-specific rules again, the regulator is not slapping the new rules on all market participants. If the customers of a Capital Market Intermediaries (CMI) are institutional investors or if the non-retail investor does not rely on the CMI to achieve Best Execution, then the companies can receive an exemption from the upcoming rules.

In addition, the Singapore supervisor confirmed that CMIs can determine the factors by which the firm uses to achieve Best Execution such as the characteristics of the execution , settlement and customer order. Additionally, it expects the CMI to consider such factors proportionately to the size, nature and complexity of their business.

How Should Companies Prepare?

“Given the deadline is less than 1 month away, brokers should be well-positioned and prepared to comply with their Best Execution obligations. However, firms that have not yet implemented the new rules may run the risk of non-compliance in the short term if they are not prepared to go live on 3 March 2022,” Gerber added.

“From a long-term perspective, the new rules may lead to more questions from clients regarding how their trades were executed. Although as a counter to that, Best Execution should help brokers more clearly articulate to clients (when asked) what factors go into a trade and if done correctly, reduce contested executions. Having processes in place to identify particular instruments and price feeds which are not meeting your firm’s execution parameters should mean you identify (and potentially rectify) them before they cause client concerns or complaints.”

Providing the best execution available is an obligation of trading services providers to their clients. However, this is not legally binding in most jurisdictions. And, Singapore is going to change that.

The Monetary Authority of Singapore (MAS) issued a notification earlier that will mandate all the capital markets intermediaries to provide the best execution to their customers from March 3, 2022. Currently, there are no formal best execution requirements in place for firms in the Asian city-state.

Sophie Gerber, TRAction Fintech
Sophie Gerber, TRAction Fintech

“Capital markets service license holders, banks, merchant banks and finance companies that conduct certain regulated activities (Capital Market Intermediaries) are subject to the Best Execution requirements,” Sophie Gerber, a Director at Sophie Grace and TRAction Fintech, explained.

“They must implement policies and procedures to execute customers’ orders on the best available terms.”

A New Regulatory Concept

But, what exactly is Best Execution? Well, it legally mandates financial service companies to provide the best available terms of order execution for their clients. It is, however, a relatively new concept in the regulatory regime. Its primary goal is to bring transparency of execution and a higher level of disclosure in transactions.

The upcoming rules are in line with the European regulatory requirements under the MiFID II around best execution that came into effect at the beginning of 2018. Then European firms had an 18-month window to develop policies and procedures for offering the best execution to their customers.

Additionally, MAS provided a generous window to the Singapore-based Capital Markets to prepare its policies and procedures as it first communicated its decision in September 2020. “The Notice formalizes MAS’ expectations of Capital Market Intermediaries (CMIs) in respect of Best Execution policies and procedures,” Gerber said.

But, not every regulator agrees with the benefits of having the best execution rules. The Australian Securities & Investments Commission (ASIC) earlier decided to bring such best execution rules but excluded them in its final product intervention order.

Coming to MAS-specific rules again, the regulator is not slapping the new rules on all market participants. If the customers of a Capital Market Intermediaries (CMI) are institutional investors or if the non-retail investor does not rely on the CMI to achieve Best Execution, then the companies can receive an exemption from the upcoming rules.

In addition, the Singapore supervisor confirmed that CMIs can determine the factors by which the firm uses to achieve Best Execution such as the characteristics of the execution , settlement and customer order. Additionally, it expects the CMI to consider such factors proportionately to the size, nature and complexity of their business.

How Should Companies Prepare?

“Given the deadline is less than 1 month away, brokers should be well-positioned and prepared to comply with their Best Execution obligations. However, firms that have not yet implemented the new rules may run the risk of non-compliance in the short term if they are not prepared to go live on 3 March 2022,” Gerber added.

“From a long-term perspective, the new rules may lead to more questions from clients regarding how their trades were executed. Although as a counter to that, Best Execution should help brokers more clearly articulate to clients (when asked) what factors go into a trade and if done correctly, reduce contested executions. Having processes in place to identify particular instruments and price feeds which are not meeting your firm’s execution parameters should mean you identify (and potentially rectify) them before they cause client concerns or complaints.”