Client consent to execution policy and execution of orders outside a regulated market or MTF - COBS Provision: Difference between revisions

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The vexed question of how clients consent to a {{tag|best execution}} policy in general, and provide permission for their orders to be handled away from regulated exchanges in particular, is covered in COBS {{cobsprov|11.2.25}} and {{cobsprov|11.2.26}}. As we shall see.
{{a|cobs|}}The vexed question of how clients consent to a [[best execution]] policy in general, and provide permission for their orders to be handled away from regulated exchanges in particular, is covered in COBS {{cobsprov|11.2.25}} and {{cobsprov|11.2.26}}. As we shall see.
 
{{prior consent and prior express consent}}
{{cobssnap|11.2.25}}
====Products which don’t trade on a {{fcaprov|regulated market}} or {{fcaprov|MTF}}====
 
While at first blush it reads as though {{cobsprov|11.2.26}} should apply to all orders, even those which cannot be traded on a [[regulated market]] in any circumstances (otc swaps for example), the confines of common sense and logic have not entirely escaped the [[European Commission]]. In its “[http://ec.europa.eu/yqol/index.cfm?fuseaction=legislation.showIssue&issueId=69&browse=true&questionId=173 Questions on Single Market Legislation]” resource, it notes:
====Commentary====
From {{tag|CESR}}'s "[[Media:CESR Best Execution QA 07_320.pdf|Best Execution under MiFID]]" Questions and Answers document of May 2007 (CESR/07-320):
 
{{quote|'''''Q20 How do clients consent to the execution policy?''''' <br>
20.1 An investment firm that executes orders or decisions to deal should obtain the prior consent of its clients to its execution policy. CESR observes that for consent to be valid, the legal provisions of the relevant Member State relating to the giving of consent must be satisfied, without prejudice to what is said in Q14 through Q16 about the information that the firm should provide to clients. <br>
20.2 '''A firm should obtain the prior express consent of its clients before executing their orders outside a regulated market or MTF'''. <br>
20.3 There are no comparable requirements for firms when they transmit or place orders with other entities for execution but do not execute orders or decisions to deal themselves. <br>}}
----
{{cobssnap|11.2.26}}
 
====Commentary====
=====Products which don't trade on a {{fcaprov|regulated market}} or {{fcaprov|MTF}}=====
 
While at first blush it reads as though {{cobsprov|11.2.26}} should apply to all orders, even those which cannot be traded on a [[regulated market]] in any circumstances (otc swaps for example), the confines of common sense and logic have not entirely escaped the {{tag|European Commission}}. In its "[http://ec.europa.eu/yqol/index.cfm?fuseaction=legislation.showIssue&issueId=69&browse=true&questionId=173 Questions on Single Market Legislation]" resource, it notes:
   
   
{{quote|However, on a purposive reading of the express consent requirement, an investment firm does not have to obtain express consent from its clients where the relevant instruments are not admitted to trading on a [[regulated market]] or [[MTF]].}}
{{quote|However, on a purposive reading of the express consent requirement, an investment firm does not have to obtain express consent from its clients where the relevant instruments are not admitted to trading on a [[regulated market]] or [[MTF]].}}


This view was confirmed in [[CESR]]'s "[[Media:CESR Best Execution QA 07_320.pdf|Best Execution under MiFID]]" document:
This view was confirmed in [[CESR]]’s “[[Media:CESR Best Execution QA 07_320.pdf|Best Execution under MiFID]]” document:


{{quote|21.2 CESR considers that on a purposive reading of the "express consent" requirement, an investment firm does not have to obtain express consent from its clients where the relevant instruments are not admitted to trading on a regulated market or MTF.}}
{{quote|21.2 CESR considers that on a purposive reading of the “express consent” requirement, an investment firm does not have to obtain express consent from its clients where the relevant instruments are not admitted to trading on a regulated market or MTF.}}


=====Products which trade {{tag|OTC}} - can the transaction a consent to execute off {{tag|regulated market}}?=====
====Products which trade [[OTC]] - can the transaction itself be a consent to execute off [[regulated market]]?====
In order to comply with this rule, the safest course is to ask clients for a generic permission to execute trades off {{fcaprov|regulated markets}} or {{fcaprov|MTFs}} across the board. Some clients might object, however, to such a wide-ranging permission.
In order to comply with this rule, the safest course is to ask clients for a generic permission to execute trades off {{fcaprov|regulated markets}} or {{fcaprov|MTFs}} across the board. Some clients might object, however, to such a wide-ranging permission.


You can of course ask instead for consent "in respect of individual transactions" (per the wording of {{cobsprov|11.2.26}}). This might seem unfeasible, but consider that for many products that might oherwise be caught (especially OTC transactions) the very act of transacting in a certain way - if that way necessarily entails trading outside a {{fcaprov|regulated market}} or {{fcaprov|MTF}} - amounts to express consent to trade in that way.
You can of course ask instead for consent “in respect of individual transactions” (per the wording of {{cobsprov|11.2.26}}). This might seem unfeasible, but consider that for many products that might oherwise be caught (especially OTC transactions) the very act of transacting in a certain way - if that way necessarily entails trading outside a {{fcaprov|regulated market}} or {{fcaprov|MTF}} - amounts to express consent to trade in that way.


And that is actually a pretty fundamental get-out.
And that is actually a pretty fundamental get-out.


There is an unspoken distrinction in the {{tag|COBS}} rules between:
There is an unspoken distrinction in the [[COBS]] rules between:
*"'''agency'''" or "'''quasi-agency'''" orders: orders whereby a  broker receives instructions from client and then turns around and interacts with third party venues (including {{fcaprov|regulated market}}s, {{fcaprov|MTF}}s but also unregulated venues like systematic internalisers), without involvement of the client, to fill that order); and  
*“'''agency'''” or “'''quasi-agency'''” orders: orders whereby a  broker receives instructions from client and then turns around and interacts with third party venues (including {{fcaprov|regulated market}}s, {{fcaprov|MTF}}s but also unregulated venues like systematic internalisers), without involvement of the client, to fill that order); and  
*"'''bilateral'''" transactions where client trades with the broker directly in a principal capacity and any transaction between the broker and the market is by way of {{tag|hedge}} and not fulfillment of the customer's order. These are things like OTC derivatives under an {{isdama}}; spot FX trades and so on.
*“'''bilateral'''” transactions where client trades with the broker directly in a principal capacity and any transaction between the broker and the market is by way of [[hedge]] and not fulfillment of the customer’s order. These are things like OTC derivatives under an {{isdama}}; spot FX trades and so on. The point is if you ask for an OTC transaction then, by definition, you are consenting for it to not be executed on exchange. In the same way that ordering a cheeseburger is, by definition, consenting to being given non-vegan food.
 
=====Consent and Express Consent=====
From the "[[Media:CESR Best Execution QA 07_320.pdf|Best Execution under MiFID]]" Q&A document:
 
{{quote|'''''Q21 What is the difference between "consent" and "express consent"?'''''<br>
21.1 Where {{tag|MiFID}} requires "prior express consent", CESR considers that this entails '''an actual demonstration of consent by the client which may be provided by signature in writing or an equivalent means''' (electronic signature), by a click on a web page or orally by telephone or in person, with appropriate record keeping in each case. <br>}}
 
 
{{cobsanatomy}}

Latest revision as of 13:30, 14 August 2024

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The vexed question of how clients consent to a best execution policy in general, and provide permission for their orders to be handled away from regulated exchanges in particular, is covered in COBS 11.2.25 and 11.2.26. As we shall see.

Products which don’t trade on a regulated market or MTF

While at first blush it reads as though 11.2.26 should apply to all orders, even those which cannot be traded on a regulated market in any circumstances (otc swaps for example), the confines of common sense and logic have not entirely escaped the European Commission. In its “Questions on Single Market Legislation” resource, it notes:

However, on a purposive reading of the express consent requirement, an investment firm does not have to obtain express consent from its clients where the relevant instruments are not admitted to trading on a regulated market or MTF.

This view was confirmed in CESR’s “Best Execution under MiFID” document:

21.2 CESR considers that on a purposive reading of the “express consent” requirement, an investment firm does not have to obtain express consent from its clients where the relevant instruments are not admitted to trading on a regulated market or MTF.

Products which trade OTC - can the transaction itself be a consent to execute off regulated market?

In order to comply with this rule, the safest course is to ask clients for a generic permission to execute trades off regulated markets or MTFs across the board. Some clients might object, however, to such a wide-ranging permission.

You can of course ask instead for consent “in respect of individual transactions” (per the wording of 11.2.26). This might seem unfeasible, but consider that for many products that might oherwise be caught (especially OTC transactions) the very act of transacting in a certain way - if that way necessarily entails trading outside a regulated market or MTF - amounts to express consent to trade in that way.

And that is actually a pretty fundamental get-out.

There is an unspoken distrinction in the COBS rules between:

  • “agency” or “quasi-agency” orders: orders whereby a broker receives instructions from client and then turns around and interacts with third party venues (including regulated markets, MTFs but also unregulated venues like systematic internalisers), without involvement of the client, to fill that order); and
  • “bilateral” transactions where client trades with the broker directly in a principal capacity and any transaction between the broker and the market is by way of hedge and not fulfillment of the customer’s order. These are things like OTC derivatives under an ISDA Master Agreement; spot FX trades and so on. The point is if you ask for an OTC transaction then, by definition, you are consenting for it to not be executed on exchange. In the same way that ordering a cheeseburger is, by definition, consenting to being given non-vegan food.
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