On 20 November 2017, the Monetary Authority of Singapore (MAS) issued a consultation paper proposing a draft notice and guidelines on the execution of customers' orders which seeks to formalise its expectations in relation to best execution.
Who? These new rules will apply to holders of capital markets services (CMS) licences, banks, merchant banks and finance companies that conduct regulated activities of dealing in securities, trading in futures contracts, leveraged foreign exchange trading, fund management and/or real estate investment trust management under the Securities and Futures Act (SFA) (collectively known as Capital Markets Intermediaries (CMIs)).
Essentially, these CMIs will be expected to have policies and procedures to place or execute customers' orders on the best available terms ("Best Execution"). This follows MAS' earlier proposals for market operators to have in place measures to facilitate its members' execution of customers' orders in the customers' interests, and to ensure that its handling and execution of bids and offers are conducted on a fair and objective basis.
What? In overview, the following key requirements are proposed:
- CMIs must establish policies and procedures for Best Execution which cover all capital markets products and capacities in which it is acting. The policies and procedures must be approved by the CMI's board of directors and reviewed periodically.
- The CMIs should consider holistically different factors, such as price, costs, speed, likelihood of execution and settlement, size and nature of the customers' order where appropriate.
- Best Execution should apply when executing customers' orders directly on a market or placing customers' orders for execution and generally applies regardless of the capacity the CMI is acting in.
- The Best Execution obligation applies regardless of the types of customers. However, when dealing with accredited, institutional or expert investors, the CMI may determine the circumstances under which such customer can be considered not to have relied on the CMI to place or execute his order on the best available terms (e.g. if the customer specifies venue and price at which the order should be executed).
- Where the CMI places and/or executes an order following specific customer instructions, it would be regarded as having satisfied its Best Execution requirements in respect of the part or aspect of the order to which the customer instructions relate.
- If there is more than one execution venue or broker available, the CMI must consider and document the merits of selecting the venue or broker which is able to execute the customer's order on the best available terms on a consistent basis.
- The CMI must periodically monitor its compliance with its Best Execution policies and the effectiveness of such policies and processes.
- Disclosure must be made to the customers prior to placement and execution of the customers' orders on the CMI's Best Execution policies and any material changes to such policies. The disclosure must be made in writing, which can be via electronic means provided that the customer has consented to the same.
- The policies should also include procedures on handling comparable customers' orders (e.g. in terms of order size) in accordance with the time or receipt of such order.
Others. MAS’ proposals come after the announcement on MiFID II coming into effect on 3 January 2018. Comparatively, the rules under MAS’ proposals are not as prescriptive as the MiFID II requirements on best execution requirement. Ultimately, the MAS expects the CMIs to establish, implement and monitor policies and procedures commensurate with its size and complexity of its operations. The CMI can take into account various factors in calibrating its policies, e.g. the type of customers it services, the types of capital markets products, the characteristics of its execution venues and the characteristics of its customers orders. At this stage, the MAS has not imposed reporting duties on execution venues or identifying passive or aggressive orders. The current obligations on market operators are not as prescriptive either. Market operators are expected to put in place measures to facilitate their members' execution of customers' orders in the customers' interests, and to ensure that their handling and execution of bids and offers are conducted on a fair and objective basis.
The Consultation Paper can be found here.