Russian regulators want to provide local brokers with more specific guidance regarding best execution requirements and have already passed a principles-based regulation.
According to a circular published by Russia’s central bank, the Federation Council approved a bill that introduces a package of rules and interpretations relating to the standards of conduct that brokers owe to their customers.
In the meantime, the regulator has upgraded the tools it uses to examine whether clients have received best executions, using ‘auto follow’ techniques. It noted that best execution considerations could come up during the whole trade allocation process, in the aggregate, including the best asset price, lowest transaction costs, and reliable counterparties.
In response to concerns over investors struggling with costs, the new rules put limits on the amount of fees that brokers can charge from their traders.
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“The law stipulates that the broker shall make back-to-back transactions at the price of the transaction conducted at the broker’s expense. In addition, there are special auto-follow rules to be implemented that prohibit charging a fee for every transaction made within such service. The draft law sets a new broker’s duty to deliver information to a client needed to make an investment decision. Currently, such information is only provided by the most responsible financial intermediaries. After the law becomes effective, such practice shall be implemented by all brokers,” it further explains.
New forms of margins
The rulemaking action also expanded the range of assets that a broker can accept from their clients as collateral to satisfy margin requirements. Effective 2021, margin transactions could be funded using foreign currencies, other than the Ruble, as well as precious metals.
The new rules are similar to the approach already taken by other regulators within ‘best practices’ frameworks. As such, the new requirements help avoid risks of regulatory arbitrage by brokerage firms, which subsequently result in legal uncertainty.
The new approach could also be seen as a response to increasing transparency requirements which define the conduct of all market participants, including the need for buy-siders to prove best execution.
Best execution is also an important part of the Markets in Financial Instruments Directive II (MiFID II). Most of the debate in relation to best execution under MiFID II has focused on the requirements for firms to publish data on execution quality and to revise their relevant policies.