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Best execution: Difference between revisions
→The four-fold test
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====The four-fold test==== | ====The four-fold test==== | ||
The Commission | The in its [[Media:letter-cesr-best-execution_en.pdf|Opinion ESC-07-2007]] the {{tag|European Commission}} set out a list of the four-fold cumulative test to help determine whether a {{fcaprov|client}} is legitimately relying on the {{fcaprov|firm}}: | ||
{{box| | {{box| | ||
# '''Initiation''': Which party initiates the transaction; <br> | # '''Initiation''': Which party initiates the transaction; <br> | ||
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The application or otherwise of best execution will depend on whether the execution of the client's order can be seen as truly done ''on behalf of'' the client. This is a question of fact in each case which ultimately depends on '''whether the client legitimately relies on the firm to protect his or her interests in relation to the pricing and other elements of the transaction - such as speed or likelihood of execution and settlement - that may be affected by the choices made by the firm when executing the order'''. The following considerations, taken together, will help to determine the answer to this question: | |||
=====Initiation===== | =====Initiation===== | ||
"Whether the {{fcaprov|firm}} approaches (initiates the transaction with) the {{fcaprov|client}} or the {{fcaprov|client}} instigates the transaction by making an approach to the {{fcaprov|firm}}. In those cases where the {{fcaprov|firm}} approaches a {{fcaprov|retail client}} and suggests him to enter into a specific transaction it is more probable that the {{fcaprov|client}} will be relying on the firm, to protect his or her interests in relation to the pricing and other elements of the transaction. | |||
=====Market Practice===== | =====Market Practice===== | ||
Questions of market practice will help to determine whether it is legitimate for clients to rely on the {{fcaprov|firm}}. For example, in the wholesale [[OTC derivatives]] and bond markets buyers conventionally "shop around" by approaching several dealers for a quote, and in these circumstances there is n''o expectation between the parties'' that the dealer chosen by the client will owe {{tag|best execution}}. | |||
=====Price Transparency===== | =====Price Transparency===== | ||
The relative levels of transparency within a market will also be relevant. For markets where clients do not have ready access to prices while investment firms do, the conclusion will be much more readily reached that they rely on the firm in relation to the pricing of the transaction. | |||
=====Available information===== | =====Available information===== | ||
The information provided by the {{fcaprov|firm}} about its services and the terms of any agreement between the client and the investment firm will also be relevant, but not determinative of the question. '''The use of standard term agreements to characterise commercial relationships otherwise than in accordance with economic reality should be avoided'''. | |||
===See Also=== | ===See Also=== | ||