Epworth Investment Management Limited (EIM) is authorised by the Financial Services Authority (FSA) to carry out the following activities: portfolio management, investment advice and execution of orders on behalf of clients.
MiFID's best execution regime requires EIM to take all reasonable steps to obtain the best possible result for its clients, taking into account price, costs, speed, likelihood of execution and settlement, size, nature or any other consideration relevant to order execution.
This requirement is of a general and overarching nature.
Although EIM has permissions covering all instruments listed in the Markets in Financial Instruments Directive (EC 2004/39) (MiFID), Annexe1 §C, its client mandates restrict it to three: transferable securities, money market instruments and units in collective investment schemes (CIS).
EIM does not deal in derivatives of any kind.
Total consideration is the price of the financial instrument and the costs related to execution, including all expenses incurred by the client which are directly related to the execution of the order such as execution venue fees, clearing and settlement fees, and any other fees paid to third parties involved in the execution of the order.
For example, an investment firm that provides a service with respect to shares admitted to trading on a regulated market will focus on the net cost (or net proceeds in the case of a sale) of executing the order on the venues available, and will direct the order to the execution venue or entity providing the best possible result in terms of total consideration. The firm may consider speed, likelihood of execution and settlement, the size and nature of the order, market impact and any other implicit transaction costs and give them precedence over the immediate price and cost factors if they are instrumental in delivering the best possible result in terms of the total consideration.
EIM as a firm that transmits or places orders with other entities for execution is, in its turn, a professional client of intermediate entities and is owed best execution as regards choice of venue (see below). EIM’s role in the chain of execution is principally to obtain a competitive price from its approved brokers.
MiFID insists on ‘total price’ – fees commissions, charges, expenses, settlement, foreign exchange, taxes, etc. As per this list, FSA draws a distinction between these explicit costs and implicit costs resulting from how the trade is executed; e.g. ‘at market’ (whatever price is current at the time of the order) or ‘limit order’ (an order to transact at a price bound by a limit). The aim is for the ‘best net price’.
The emphasis is on both large and small orders, which may have a market impact. The basis for the choice of venue must be demonstrable.
The frequency with which prices change varies with different instruments, market conditions and execution venues, e.g. the market may move, so that a demonstrably rapid and or effective venue is called for. However, for large or small orders and orders for less liquid instruments, under certain market conditions other considerations may outweigh speed.
The best price may be illusory if the venue has no depth. Market depth must be demonstrable as must settlement considerations.
Limit orders, warehoused trades (incomplete trades held on the broker’s books overnight to be added to the completed trade the following day), etc. Competence and reputation in these fields would support the choice of the broker.
When carrying out transactions on behalf of clients, EIM proceeds in three stages:
When an action is decided the portfolio manager (PM) notes the time and the allocation between clients on the Order Pad.
At the time of the decision a screen print is taken from the appropriate data provider.
Before an order is given, the PM will check the market with selected brokers. The time of the order is noted and a second screen print is taken if there is a material time lapse between the decision and order. An explanation is provided in such cases.
The time and price are noted as per the broker’s confirmation initially on the telephone and by faxed print out.
EIM gives the greatest weight to Price and Costs, in line with its evaluation of the market at any time.
EIM clients are all categorised as ‘professional’. They all have the same ‘charitable’ background, have similar mandates in terms of investment policy (e.g. the ethical dimension) and are mid-sized in terms of the amounts managed by EIM.
Under the circumstances EIM does not differentiate in its investment/execution approach between clients.
As noted above, EIM is restricted in instrument choice to equities, bonds, money market instruments and units in CIS. Each of these instruments has a specific investment and execution profile. However, these specifics do not lead to divergence from the general best execution/best result approach.
In general the firm gives limit orders, which to a certain extent reduces the impact of implicit factors, particularly since maximum rather than specific size is the rule leaving the broker to work the market. Pre-allocation ensures equal pro rata treatment between clients in the case of partially filled orders.
Under MiFID portfolio management firms such as EIM must ensure compliance with the best execution obligation by identifying the broker/dealers who will provide ‘best’ for the relevant instruments and monitor the execution quality of those identified.
MiFID clarifies that its best execution provisions are not intended to require a firm that transmits or places orders with other entities for execution to duplicate the efforts of its execution entities. Rather, a firm should determine that the entities it uses will enable it to comply with the overarching best execution requirement when placing an order with, or transmitting an order to, another entity for execution.
The Committee of European Securities Regulators (CESR) adds (07-320. Q.22(3)): ‘Furthermore, with respect to the relevant business, if an entity is subject to Article 21[of MiFID] or undertakes by contract to comply with Article 21, and the firm merely transmits or places orders with the entity for execution, taking few steps itself that affect execution quality, and the firm has determined that the entity has arrangements that will enable the firm to comply with its obligations under Article 45 [of the MiFID Implementing Directive 2006/73 (Level 2)], then CESR considers that the firm will be able to place a high degree of reliance on that entity in order to comply with its own overarching best execution requirement. That is, in these circumstances, CESR considers that a firm would be complying with the overarching best execution requirement with respect to particular orders simply by placing them with or transmitting them to such entities.’
EIM is not restricted to using entities subject to MIFID for carrying out orders. In order to be able to use an entity that is not subject to the MiFID best execution regime, in particular a non-EEA service provider, it is necessary, however, to ensure that the execution arrangements of such an entity allow them to comply with the overarching best execution requirement.
One venue that EIM has recourse to via its brokers is the ‘over-the-counter’ market (OTC). Transactions in the Euro bond and even the gilt market are often more efficiently carried out OTC either directly with an eligible counterparty (ECP) (rough equivalent of the pre-MiFID ‘market maker’) or an agency broker who will check prices with a number of ECPs.
EIM is required to obtain consent from clients to the whole of its execution policy. EIM is required to obtain express consent before executing OTC orders outside a regulated market.
EIM maintains a list of approved brokers (Appendix A). They are selected on the basis of their ability to provide ‘best result:
As noted, a broker’s ability to produce ‘best’ results in the fields of price and costs is of most significance followed by speed, likelihood of execution and settlement, the size and nature of the order, market impact and any other implicit transaction costs.
EIM charges a fee representing a percentage of funds under management as per client agreements. Brokers’ transaction/settlement fees and commissions are passed through to the client without change. It is of major importance that the latter remain reasonable and in line with market practice.
In the approved broker list will be found ECPs and agency brokers. The latter are retained as offering the possibility of a wider market price check than can be carried out by the PM.
Broker authorisation. Within the EEA only those brokers that are bound by Article 21 of MiFID are eligible.
As noted above, EIM is not restricted to using entities subject to MIFID for carrying out orders for example when carrying out orders outside the EEA. However, in such cases EIM is required to ensure that equivalent best execution obtain to those in MiFID.
The list of approved brokers is reviewed semi-annually and approved by the Board.
CESR notes that a firm may in exceptional circumstances use venues not listed in its policy, for example on a provisional basis or to accommodate a client request to trade in an unusual instrument, with a view to satisfying the overarching best execution requirement. In EIM’s case such circumstances will be addressed in the semi-annual review.
It is clear that the performance of a client’s portfolio has a direct effect on the future prospects of a PM. As such, the close monitoring of best execution is of prime mutual interest.
During the course of a transaction the PM has several opportunities for verifying best execution:
EIM makes use of the services of an outside monitoring consultant which semi-annually monitors and reviews portfolio compliance.
The outside consultant’s report is submitted to the Board semi-annually.
Various aspects of EIM’s best execution arrangements are outlined in the above Policy:
EIM believes that the above permits the firm to assure best execution to its clients.
