The PRA published the minutes of a meeting of the Foreign Exchange Joint Standing Committee on 22 April 2016, that include a summary of a presentation by Edwin Schooling Latter, FCA Head of Markets Policy, on the FCA’s views on the application of best execution to FX derivative and spot transactions.
Mr Schooling Latter stated that all FX derivative transactions and those FX spot transactions that are ancillary to transactions in MiFID financial instruments are within the scope of the best execution requirements set out in the Markets in Financial Instruments Directive (MiFID). He noted that best execution would still apply when the firm was dealing as principal, including where dealing with a professional counterparty, where the counterparty was placing legitimate reliance on the firm.
For other FX spot transactions, he said the FCA considered that the obligations arising would vary according to the nature of the relationship between market participants:
- Acting as agent. This scenario relates to a firm that acts on behalf of a client and executes transactions in line with their mandate, with a responsibility to use the firm’s efforts to secure an optimal outcome. In this case, best execution would be an appropriate benchmark, even if, for transactions not within the scope of MiFID, there was not a MiFID best execution requirement.
- Acting as principal. This scenario involves a firm acting on its own behalf, providing two-way quotes to clients with no obligation to execute the order until both parties are in agreement, where the client has the flexibility to seek other quotes. In this scenario, the principal has no best execution requirements.
- Acting as principal with some discretion. This scenario relates to circumstances where a client could be considered to have placed some legitimate reliance on the principal. In this scenario, the principal has obligations to try and achieve an optimal outcome for the client, for example when managing stop-loss orders.