FMSB publishes Spotlight Review on measuring execution quality in FICC markets

7 September 2020 – The FICC Markets Standards Board (FMSB) has today published a Spotlight Review looking at the challenges in measuring quality of trade execution and how this varies across different market participants and segments. 

While not a new concept, in the last four years there has been a significant focus on best execution and transaction cost analysis by both market participants and regulators. 

As a result, measuring and evidencing trade execution quality has become critical to client servicing as well as to demonstrating ongoing compliance with investor protection regulations. A firm’s ability to do this well depends heavily on the quality of data available.  

While the various regulatory requirements for measuring execution quality vary by jurisdiction and asset class, wholesale fixed income, currencies and commodities (FICC) markets face specific challenges in achieving high standards of transparency, openness and fairness. This Review explores the root cause of these challenges, highlights the progress made in regulation and market participants’ practices with regard to data reporting and best execution, and sets out key points of focus for firms in navigating these difficult waters.  

This Review therefore examines the following topics: 

  • the observability of relevant data sources;  
  • the reliability and quality of data sources; 
  • variations in data observability and reliability across different products;
  • obligations and priorities in measuring execution quality; and
  • a role for industry standards.

This Spotlight Review is intended to benefit front office trade execution on the buy-side as well as within market makers, and those responsible for overseeing regulatory requirements in compliance and risk functions. 

Mark Yallop, Chair of FMSB, said: “This Spotlight Review, the final in a series on market structure, looks at themes of best execution and transaction cost analysis (‘TCA’) that have grown in importance in recent years. It suggests that there may be benefits to agreeing broad best practices for measuring execution quality, both to better fulfil regulatory requirements and to achieve greater operational and cost efficiency. Drawing on themes already identified in earlier Spotlight Reviews, this study highlights the importance of ensuring good quality data – from the broadest, most reliable and most appropriate sources – in order to measure the quality of trade execution.” 

Rupak Ghose, Senior Adviser at FMSB, said: “The series of four market structure Spotlight Reviews focused on emerging themes such as model risk in algorithmic trading, the critical role of data management, the changing surveillance environment and processes around measuring execution quality. A common theme throughout this series is the increasing importance of data quality and technology advancements, such as machine learning, in shaping the financial market landscape. Ensuring that governance and industry best practice keeps up with the rapid evolution of these trends is more important than ever in today’s complex financial system.” 

This Spotlight Review is the fourth and final in a series that is collectively looking at issues of FICC market structure and the impact of regulatory and technological change on the fairness and effectiveness of wholesale markets.  

This Spotlight Review is available for download on FMSB’s website at fmsb.com/our-publications/#spotlight-reviews. The other three Spotlight Reviews in the market structure series are available at: 

Emerging themes and challenges in algorithmic trading and machine learning
The critical role of data management in the financial system 
Monitoring FICC markets and the impact of machine learning 

Measuring execution quality in FICC markets

Measuring and evidencing trade execution quality has become critical to client servicing as well as to demonstrating ongoing compliance with investor protection regulations. A firm’s ability to do this well depends heavily on the quality of data available.

While the various regulatory requirements for measuring execution quality vary by jurisdiction and asset class, wholesale fixed income, currencies and commodities (FICC) markets face specific challenges in achieving high standards of transparency, openness and fairness.

This Review examines the following topics:

– the observability of relevant data sources;
– the reliability and quality of data sources;
– variations in data observability and reliability across different products;
– obligations and priorities in measuring execution quality; and
– a role for industry standards.

This Spotlight Review is intended to benefit front office trade execution on the buy-side as well as within market makers, and those responsible for overseeing regulatory requirements in compliance and risk functions.

Media Contacts
Maitland/AMO 
Andy Donald or Sam Turvey
+44 207 379 5151 
adonald@maitland.co.uk 
sturvey@maitland.co.uk 

Notes to Editors 

1) The Fixed Income, Currencies and Commodities Markets Standards Board (‘FMSB’) is practitioner led, funded by members and operated by the major participants in wholesale markets to improve standards of conduct in wholesale fixed income, currencies and commodities (FICC) markets. It aims to bring transparency to grey areas in the wholesale FICC markets by identifying emerging vulnerabilities, clarifying and documenting practice and agreeing standards to improve conduct and market behaviour. Ensuring that wholesale FICC markets are transparent, fair and effective for all participants is at the heart of FMSB’s mission.  

FMSB Standards set out Core Principles and accompanying guidance on the most important aspects of practice where ambiguity risks undermining the transparency, fairness and effectiveness of markets. 

FMSB Statements of Good Practice set out clear expectations and guidance on good practice in relation to broader areas of uncertainty in wholesale FICC markets. 

FMSB Spotlight Reviews encompass a broad range of publications used by FMSB to illuminate important emerging issues in FICC markets. Drawing on the insight of members and industry experts, they provide a way for FMSB to surface nascent challenges market participants face and may inform topics for future work. Spotlight Reviews will often include references to existing law, regulation and business practices. However, they do not set or define any new precedents or standards of business practice applicable to market participants. 

All FMSB publications are available on the FMSB website at fmsb.com/our-publications/

2) Setting up the FMSB was one of the main recommendations from the Fair and Effective Markets Review (FEMR), which was conducted by HM Treasury, the Bank of England, and the Financial Conduct Authority.  

FEMR set FMSB four strategic goals: 

  1. Identifying global market vulnerabilities through scanning the horizon for emerging business practice risks.
  2. Developing best market practice through the production of standards and other materials that create a common understanding.
  3. Driving global adherence through ensuring standards are comprehensible and practical. 
  4. Developing consistent approaches to market practices through identifying gaps and inconsistencies in existing regulatory standards and working with other standards setting bodies. 

3) FMSB has a Standards Board drawn from senior executives from across wholesale markets, from corporate clients, asset managers, sell-side participants and intermediaries and infrastructure providers such as exchanges and custodians. In specialist, focused committees, subcommittees and working groups, industry experts debate issues and develop FMSB Standards and Statements of Good Practice, and undertake Spotlight Reviews that are made available to the global community of FICC market participants and regulatory authorities. 

4) FMSB members bring together sell-side investment banks, buy-side asset managers, market infrastructure providers and exchanges, custodians and users of the market such as corporates. This constitution is unique.  

The member firms are listed and available on the FMSB website at fmsb.com/who-we-are/ 

Last updated 7 September 2020