The FICC Market Standards Board (FMSB) recently published a spotlight review on the ability of FICC (fixed income, currencies and commodities) market participants to measure trade execution quality (the “Review”).

The Review comes amid increasing market interest in best execution and transaction cost analysis from both regulators and clients particularly in the wake of MiFID II. The Review notes that historically FICC market participants have “face[d] specific challenges in achieving high standards of transparency, fairness and openness”, in particular the ability of FICC market participants to measure execution quality and demonstrate regulatory compliance has often been considered to be limited by the quality and volume of data available to them.

The Review considers these issues and looks at some of the key areas of interest for regulators and market participants, including in summary:

Topic Key points
Observability of relevant data sources
  • Revised regulatory requirements for OTC FICC markets have “significantly increased the amount of trade data that is required to be reported by market participants”, but the data available remains much more limited than for equities or exchange-traded markets.
  • The Review sets out some helpful guidance for firms considering the relevance and availability of different data sources.
Reliability and quality of relevant data sources
  • In addition to ensuring they have adequate data, market participants should focus on ensuring that the data is high quality and fit for purpose, including by way of diligence to ensure that the creation and/or aggregation of data is robust.
  • The Review outlines a number of data sources available to FICC market participants with specific issues to be aware of when assessing the quality and reliability of those sources.
Variations in data observability and reliability
  • The FICC markets are extremely diverse – this contributes to the challenges associated in measuring execution quality. The Review summarises data quality issues on a FICC product-by-product basis.
  • Generally, data is more widely available and of a higher quality in highly liquid markets for less complex products, with the best data available on US Treasury bonds and G10 foreign exchange markets and the least on exotic derivatives and securitised products.
Obligations and priorities in measuring execution quality
  • There are commercial benefits in measuring execution quality and sophisticated clients increasingly seek out best practice to avoid execution costs. The Review sets out some of the policy considerations in relation to approaching to best execution.

Finally, the Review considers best practice and ways in which transaction cost analysis (TCA) and best execution could be further improved. The Review warns that, in light of the diversity and scale of the FICC markets, it would be impossible to impose “one-size-fits-all” requirements for best execution and TCA. Rather, the FMSB proposes that the focus should be shifted to “standardised models and processes” that can function as principles of best practice. Continued development of industry best practice will be an important factor in continuing improvements to execution quality.

As this topic will clearly continue to be a focus for both regulators and clients, firms operating in the FICC markets should consider their existing execution models and related processes in light of the Review’s conclusions. It remains to be seen whether the FCA will, in future, look to apply more specific best execution standards in the FICC markets, but firms that have demonstrated an awareness of evolving market practice and a commitment to continuous development of execution quality are likely to find themselves in a more robust position in relation to both regulator and client expectations.

Clive Cunningham

Clive Cunningham
+44 20 7466 2278

Mark Staley

Mark Staley
Senior Associate
+44 20 7466 7621

Harry Millerchip

Harry Millerchip
+44 20 7466 6447