Dealing And Managing Flashcards
Briefly explain the concept of “Best Execution Obligation”
- Set of rules for firms to take reasonable steps to obtain the best possible results for their clients when executing orders.
- Firms should establish and implement a “best execution policy” containing the process by which they will obtain the best possible result for clients.
- Best execution policy should be up-to-date.
- Best possible result is determined by taking into account the price, costs, speed, likelihood of execution and settlement, size, nature and anything else relevant to the execution of the order
- Information on the policy should be given to clients and they should consent to it.
- For executing trades outside a regulated market/ MTF - consent from the client should be obtained
Best execution obligation
When executing a client order -
What is the criteria that a firm should take into account for determining the relative importance of the execution factors and to achieve the best possible results for the client ?
- Characteristics/ type of the client -
A. Are they retail or professional?
B. Retail clients need more protection - Characteristics/ nature of the client order -
A. – Is it a large or small order?
B. Is it urgent? - Characteristics of financial instruments that are the subject of the order.
A. Different investments work differently. B. E.g. shares, bonds, and derivatives may need different execution strategies. - Characteristics of the execution venues to which the order can be directed.
A. Where is the order being executed?
B. Consider which exchange/ trading venue offers the best price, fastest execution, or best overall conditions for the client.
Briefly explain what the “Order Execution Policy” is
- It’s a set of rules that a firm follows to make sure it gets the best possible result when carrying out a client’s trade.
- It explains:
A. How the firm decides where and how to place orders (e.g., which stock exchange or trading platform to use).
B. What factors matter most (e.g., best price, speed, or cost).
C. How different types of investments (like shares, bonds, or derivatives) are handled.
D. How the firm ensures fairness and transparency in executing trades.
Order Execution Policy
What details should the firm provide to retail clients on their execution policy?
- Timely Information –
A. Clients must receive the details before they start using the firm’s service. - Key Information to Include:
A. How execution factors are prioritised by the firm –
I. Explain what matters most when executing an order (e.g., price, speed, cost)
II. How these factors are decided.
B. Where orders are placed –
I. Firm must list the main exchanges or trading venues it relies on to get the best possible result for clients.
C. Impact of client instructions –
I. For when a client gives specific instructions (e.g., requesting a trade on a particular exchange)
II. The firm must warn them that this may limit the firm’s ability to get the best possible result.
- How Information is Provided to clients –
A. The execution policy must be given in a durable format (such as a document, email, or secure website) so clients can refer back to it.
Explain the review process for the “best execution policy” and the “order execution policy”
- These should be reviewed annually.
- Firms should monitor their effectiveness to identify and, where appropriate, correct any deficiencies
- Review/ should also be conducted when there’s a material change within the firm and it affects their ability to continue to obtain the best possible result for clients.
Client order handling
What are the conditions of firm must satisfy when carrying out client orders to ensure fairness, transparency, and efficiency?
- Record and Allocate Orders Properly – A. Orders must be accurately recorded and assigned as soon as they are executed to avoid errors or unfair treatment.
- Process Similar Orders Fairly and Quickly –
A. If multiple clients place comparable orders, they should be carried out in the order they were received and without unnecessary delays
B. UNLESS, market conditions or client interests require a different approach. - Inform Clients of Any Issues –
A. If there is a major problem in executing an order (e.g., system failures, market disruptions), the firm must tell retail clients immediately so they are aware of the situation.
If a firm wants to carry out a client order or a transaction for their own account in aggregation with another client order -
I.e. if a firm wants to combine a client’s order with another client’s order or with a trade for the firm’s own account
What conditions must be met in order to do this?
- No Overall Disadvantage to Clients –
A. Firm must ensure that combining the orders will not generally harm any client involved.
B. This means clients should not receive worse prices or execution results because of the aggregation. - Clients Must Be Informed of Possible Disadvantages –
A. Firm must tell clients beforehand that, in some cases, aggregation could work against them for a particular order
B. I.e. they might not get the full amount they requested or the best possible price - Fair Allocation Policy –
A. Firm must have a clear, detailed policy on how orders will be fairly divided among clients.
B. This includes:
I. How the size and price of orders affect allocation.
II. How partial executions (where only part of the order gets completed) will be shared fairly among clients.
Personal Account Dealing
Briefly explain what personal account dealing means
- Refers to when employees of a financial firm trade investments for themselves rather than for clients.
- Since employees may have inside knowledge or conflicts of interest, firms must have rules to ensure they:
A. Do not misuse confidential information for personal gain.
B. Do not trade in a way that conflicts with client interests.
C. Follow company policies, such as getting approval before making personal trades.
What restrictions are placed on employees regarding personal account dealing to prevent conflicts of interest and market abuse?
- Restricted Transactions –
Employees cannot make trades if:
A. The law (Market Abuse Regulation, MAR) prohibits them.
B. They misuse or improperly share confidential information.
C. The trade conflicts with the firm’s obligations to its clients under MiFID or other regulations. - Encouraging Others to Trade Unfairly – A. Employees must not advise or influence others to make trades that they themselves are not allowed to do.
- Improper Disclosure of Information –
A. Employees cannot share confidential investment-related information unless, it is part of their job.
B. If they do, they must not:
I. Trade based on that information.
II. Encourage someone else to trade using that information.
What must firms do to ensure employees follow personal transaction rules?
- Employees must be made aware of the firm’s rules and restrictions on personal transactions.
- If an employee makes a personal transaction, they must inform the firm promptly.
- If a firm outsources work to another company, it must ensure that employees of that company also follow these rules.
- The firm must keep a record of all personal transactions and note any restrictions or approvals related to them.
Are there any exceptions to personal transaction rules? If so, what are these?
The rules DO NOT APPLY to:
- Personal Transactions made under discretionary portfolio management (where a professional manages the investments on behalf of the employee).
- Personal transactions in unit shares of collective investment funds (like mutual funds).
- Personal transactions in life insurance policies (they are not typically used for short-term trading or market abuse).
These exceptions exist because the employee does not have direct control over the specific investments in these cases.
