On 10 April 2025, the European Securities and Markets Authority (“ESMA”) published two final reports on firm’s order execution policies under MiFID II and rules on systematic internalisers, volume cap and circuit breakers.
The initial consultations were launched in July 2024 (see Consultation Paper on Order Execution Policies and Third Consultation Package of MiFIR Review) following the MiFID and MiFIR reviews.
Key Highlights
Key highlights of the final reports are set out below:
Criteria for Establishing and Assessing the Effectiveness of Investment Firms’ Order Execution Policies
The background for this is that ESMA was mandated to develop Regulatory Technical Standards (“RTS”) on the criteria for establishing and assessing the effectiveness of firms’ order execution policies due to the perception that many firms’ order execution policies were not sufficiently robust.
The final report provides this RTS for submission to the European Commission, with key requirements being:
- Establishment of an order execution policy: Investment firms must delineate their internal governance procedures for selecting execution venues and ensuring these venues are authorised by competent authorities. They must maintain a comprehensive list of selected execution venues and include detailed information on the circumstances under which each venue may be utilised.
- Assessment and monitoring of the order execution policy: Investment firms must implement a monitoring procedure to observe the effectiveness of their order execution arrangements and policy at least once every three months and to assess their effectiveness at least annually or when there is a material change.
- Selection of execution venues: Investment firms must consider the characteristics and needs of their clients when selecting the initial execution venues, such as the availability of order types, investment amount, and the typical frequency and value of orders from their clients. When a client order may be executed on more than one execution venue, the investment firm shall specify the criteria and their relative importance for identifying the execution venue that obtains the best possible result.
- Specific client instructions: Investment firms shall establish arrangements for handling specific client instructions and define how to differentiate between orders with and without such instructions, as well as the impact on the execution venues selection criteria and their ability to obtain the best possible result for the client.
Compared to the earlier consultation paper version of the RTS, ESMA has:
- moved away from a “Classification of Financial Instruments” (“CFI”) methodology to an approach inspired by RTS 28, reducing the number of classes to 10;
- where firms only use one execution venue, requiring firms to set out how this obtains the best possible result for clients and control this in their assessment of the order execution policy;
- introduced more discretion for firms to analyse the necessary order sizes and their monitoring frequency;
- removed the proposed requirement for a warning prior to placing an order that a client’s selection of an execution venue prevents the firm from obtaining the best possible result for the execution of the order;
- introduced more prescriptive requirements where an order execution policy allows for dealing on own account; and
- introduced a proposed implementation period of 18 months to allow firms to update their order execution policies.
Whilst the proposed 18-month implementation period is helpful, the RTS represents a significant uplift in the applicable requirements for order execution policies. Impacted firms should consider the RTS and assess how to uplift their order execution policies and any knock-on impacts on practical procedures.
Recasting RTS 7 into RTS 7a
The proposed draft of RTS 7a has come out of ESMA’s mandate to provide RTS specifying the principles and information to be disclosed for circuit breakers. The final report outlines the key requirements, being:
- Introduction of requirements for circuit breakers: RTS 7a introduces new requirements for the establishment of circuit breakers. Trading venues will be required to establish circuit breakers in the form of trading halts, price collars, or other mechanisms which can halt and constrain trading. RTS 7a also specifies the principles for establishing the methodology for the calibration of circuit breakers.
- Public disclosure: RTS 7a introduces a list of homogeneous information which trading venues should disclose to the public and contains a standardised template to report information to National Competent Authorities (“NCAs”).
Whilst ESMA has taken on board several pieces of feedback during the consultation process, the changes since the previously consulted version are relatively minor and technical.
The new RTS 7a is also a general recast of the current RTS 7, as ESMA has suggested multiple changes to update the RTS, including the removal of articles seen as redundant in light of the Digital Operational Resilience Act (“DORA”), and to align other requirements with DORA provisions.
Trading venue operators should review the RTS 7a requirements to consider how to implement the new circuit breaker requirements and assess any consequential changes to policies and procedures resulting from the recast.
Amendments to RTS 3 and New ITS on SI Notification
ESMA has also finalised its draft RTS amendments to RTS 3 to reflect the move from the “double volume cap” to the “single volume cap”, with the removal of the trading venue-specific threshold and the lowering of the threshold for total trading volume in the EU to 7%.
The new Implementing Technical Standards (“ITS”), under which investment firms are required to notify their NCA when they acquire or alter their Systematic Internaliser (“SI”) status have also been finalised. Under these new rules, notifications must be submitted within 20 calendar days following the change, using a standard template.
Next Steps
The draft RTSs and ITS in the final reports have now been submitted to the European Commission for adoption and endorsement, which should be decided within three months’ time.
Co-authored by Rowena Lee, Trainee Solicitor
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