They unbridled joy of reading MiFID 2 in full should not be missed, but in case you’re a little busy with other things, here is the NCFX summary of the key points from MiFID 2 (and a few other pieces of regulatory legislation) as they related to Foreign Exchange:

A Guide to FX Best Execution

MiFID 2:


In FX under MiFID 2 the best execution obligation applies to executing orders in OTC derivatives; it therefore does not naturally extend to spot transactions, with the exception that it applies to FX deals that are ancillary to trades in assets that are covered by MiFID 2 best execution rules. This means that effectively any trading done outside of the base currency in stocks, shares and bonds will impose a duty of best execution on both the underlying spot and any forward hedge.  We would also point out that obligations stemming from PRIIPs and general treating clients fairly rules do in fact extend to spot transactions in any case.   It is not entirely clear if ‘over-reporting’, i.e. throwing in speculative spot transactions to MiFID 2 reporting is wrong or not, but we prefer to err on the side of caution and therefore suggest clients should include them.  In short then, best execution rules apply to pretty well any FX business executed by an Asset Manager.

Best execution obligations apply when a firm executes an order. Obligations do not apply if a client gives specific instructions, but if they do, managers must provide a warning to retail clients that the best execution rules are being waived.

Best execution obligations are due to both retail and professional clients. Best execution continues not to be owed to eligible counterparties.

Execution Policy

The root of best execution lies in creating a robust framework under which to conduct execution, measure that execution against the execution framework and improve it where possible.

MiFID 2 requires that ‘all sufficient steps’ are taken in pursuit of best execution.  The Execution Policy must explain precisely what those steps taken in pursuit of best execution are.  The policy must consider client classification, the services to be provided, execution factors, execution venues being used and any specific instruction.

The Execution Policy should include criteria for determining the relative importance of best execution factors, with a clear metric and rationale given to each.  This should include details of:

  • Characteristics of the client type (retail or professional)
  • Characteristics of the client order type
  • Characteristics of financial instruments that are the subject of that order type
  • Characteristics of the execution venues to which that order can be directed

The Execution Policy must also explain how the various execution factors are considered as part of ‘all sufficient steps’.

Execution factors to be considered:

  • Price
  • Costs
  • Speed
  • Likelihood of execution and settlement
  • Size, nature or any other consideration relevant to the execution of the order

In reporting costs, the asset manager must include:

  • All expenses incurred by the client which are directly relating to the execution of the order (including execution venue fees, clearing and settlement fees)
  • Any other fees paid to third parties involved in the execution of the order

Execution policy – Summary

Firms must provide retail clients with a summary of the policy.  We feel that it is likely that professional clients will ask for the execution policy, but it is not obligatory to provide it.  The summary should:

  • Be tailored for retail clients. Presumably this means clear and concise as per the PRIIPs obligations.
  • Focus on price.
  • Include link to most recent execution quality data published.
  • Inform clients of material changes in arrangements or processes. ‘Material change’ is a significant event of internal or external nature that could impact any of the best execution factors listed above.

Post Trade Obligations

The Asset Manager must:

  • Inform its client where an order was executed.
  • Summarise and make public, on an annual basis, the top five execution venues in terms of trading volumes in the preceding year and provide information on the quality of execution obtained. (RTS 28 Report)
  • Monitor the effectiveness of its order execution arrangements and to correct any deficiencies in the process and policy. This monitoring should focus on and take into account the information established in the RTS 28 report.
  • Demonstrate to the regulator that they have executed their orders in accordance with their execution policy and their general compliance with the best execution obligation

In Summary

Managers must build a clear framework in which an execution policy is designed, built and used to benchmark execution.  The results are then compared to expectations under the policy and the policy is adjusted in order to create a continually improving outcomes for clients.


PRIIPs is a re-tread of UCITS IV and requires a new Key Information Document (KID) which standardises pre-sale disclosure information.  The obligations for Asset Managers using FX products are clear and simple under these rules.


PRIIPs reporting obligations include products manufactured by:

  • Asset managers (both UCITS and non-UCITS funds)
  • Insurance companies (for life insurance products)
  • Banks (structured deposits, derivatives, securitisations, Special Purpose Vehicles (SPVs)
  • Corporates (structured securities, convertible bonds)

The term ‘retail’ from the title is somewhat misleading, as the EU’s Michael Barnier points out, the PRIIPs KID regulation ‘aims to ensure that no investment product slips through the net’.  Effectively if you are selling a product that could be purchased by a client who may have elected to be considered retail, you’re obliged to comply.

What does disclosure entail?

The form of the KID must be a short, concise document (no more than 3 sides of A4) using language that avoids jargon so as to be understandable by the average retail investor.  It must be written in a common format and be completely distinct from other marketing material.

The KID must include:

  • The identity of the product
  • The identity of its manufacture
  • The nature and main features of the product
  • Whether the investor might lose capital
  • The product’s risk and reward profile
  • Costs
  • Past performance
  • Any applicable compensation or guarantee schemes
  • Other information necessary for specific products.
  • If the scheme is deemed ‘complex’, then a “comprehension alert” must be added to the KID

The KID is only required to be provided to retail investors. Bear in mind changes in MiFID 2 2 to the classification of ‘retail investors’ which could mean that a wider group of investors will need to receive the KID.

KID Requirements for FX:

Annex VI is perfectly clear on what must be reported in the KID for FX:

  1. In calculating the costs associated with foreign exchange, the arrival price must reflect a reasonable estimate of the consolidated price, and must not simply be the price available from a single counterparty or foreign exchange platform, even if an agreement exists to undertake all foreign exchange transactions with a single counterparty.

Breaking this down:

  1. Asset Managers must use an arrival price midrate to compare their executed transactions against. This means that the Asset Manager must be able to time-stamp the transaction as it leaves their environment to ascertain the arrival price.  The goal here is that the client should have full control of the time reference used to measure cost, and that control of the timestamp should not be passed to the bank or broker.
  2. Asset Managers cannot use an estimate of cost from their bank or broker. The Asset Manager is effectively responsible for the cost calculation as they must use the timestamp sourced from their system as noted above.
  3. Asset Managers must use a consolidated rate. The Asset Manager must establish the arrival price midrate at the time of their timestamp from data that does not come from a single course or platform.  This means that the Asset Manager cannot ask their bank or broker to supply data.  In addition, they cannot use data sourced from a single platform.  The data used must be consolidated, meaning it must be representative of the broad FX marketplace.  This does not mean that it is OK to take data from two platforms and add it together, or choose one price or another, it must be calculated in an unbiased way and streamed so that every millisecond has a related reference price.  This is VERY hard to achieve.
  4. This applies even if you trade with your custodian. In fact, that’s almost the entire point of the clause, one might imagine.

In Summary

Managers must disclose total annualised FX costs across products (Spot, Swap, Forward, Options) measured against an arrival price benchmark and calculated against a rate that doesn’t come from a single provider or system.  Our advice would be to ensure that measurement is independent in all aspects and that managers pay for this rather than pushing the cost onto clients.

New Change FX

The NCFX Midrate is a live, consolidated and highly aggregated FX feed that cannot be directly traded on.  As such it represents a high quality independent data source and acts as the foundation of any execution policy or reporting requirement.  By coupling NCFX data with NCFX TCA applications it becomes simple to solve FX reporting requirements.