On 3 September 2020, the Monetary Authority of Singapore (MAS) published a new set of requirements on the execution of customer orders and issued its consultation response on this topic. In doing so, the MAS formalised its existing expectation that financial institutions conducting dealing and fund management activities under the Securities and Futures Act (SFA) must do so fairly and act in the interests of their customers. The new requirements also align the Singapore position on execution of customer orders more closely with those which apply in jurisdictions such as the European Union and Hong Kong.
We summarise below the key implications of the new requirements you should be aware of if you perform board or senior management, legal, compliance, risk management, front office or relevant operational functions for a capital markets intermediary (CMI) in Singapore that executes or places orders for capital markets products on behalf of its customers.
What are the core requirements?
The new requirements are set out in a Notice on Execution of Customers’ Orders (the Notice) and accompanying guidelines, which will take effect on 3 March 2022, thus providing you with an 18-month period to ensure your CMI becomes fully compliant. The requirements will apply if your CMI is licensed or exempted under the SFA to conduct the regulated activities of dealing in capital markets products, fund management and/or real estate investment trust management. Your CMI will generally be subject to these requirements if it is a bank, broker or fund manager.
The Notice, which is legally binding, requires your CMI to establish and implement written execution policies and procedures that are commensurate with the nature, scale, and complexity of its business. These policies and procedures are to apply in respect of the CMI’s placing or execution of customer orders for the purchase or sale of any capital markets product – i.e. any security, unit in a collective investment scheme (CIS) or leveraged spot foreign exchange trade. The policies and procedures must provide for your CMI to place or execute customer orders on the best available terms (commonly referred to as “best execution”) and to place or execute comparable customer orders in accordance with the time of receipt of such orders.
The policies and procedures should cover all capital markets products and all principal and agency capacities in which your CMI acts (as applicable). The requirement for best execution applies where your CMI executes orders directly on an execution venue or places orders for execution with another CMI or overseas regulated person.
Which customers are in scope of the requirements?
The starting-point is that “customers” include any type of retail or non-retail customer except for “institutional investors”1 on whose behalf, or with whom, your CMI deals in capital markets products. Additionally, a CIS (which would ordinarily qualify as a type of institutional investor) must be treated as a customer, on the basis that the underlying investors of a CIS would generally expect the CIS to be accorded best execution by its fund manager.
Other categories of non-retail customer include “accredited investors”2 and “expert investors”3. While the new requirements generally apply in respect of these customer types, you may assess and document the circumstances under which such accredited investors and expert investors do not rely on your CMI for best execution. Relevant circumstances may include whether the customer initiates the order or whether the customer specifies the venue and price at which the order should be executed.
Importantly, your CMI may also refer to relevant guidance provided by other regulators that it has assessed to be appropriate. This will be helpful if you operate within an internationally active group which already maintains order execution policies and which applies criteria based on other regulatory frameworks to determine whether customers rely on group entities for best execution (e.g. under the European Markets in Financial Instruments Directive (MiFID)), as you will potentially be able to apply the same criteria in Singapore.
How should you assess best execution?
You should ensure that your CMI’s best execution policies and procedures take account of relevant factors, which may include price, costs, speed, likelihood of execution and settlement, size and nature of the order, or any other considerations relevant to the placement and/or execution of the order.
The policies and procedures should also describe how the relative importance of these factors is determined. For this purpose, considerations you should take into account include the types of customers your CMI serves, the capital markets products for which it accepts, places or executes orders, the characteristics of the execution venues or brokers to which orders can be directed, and the characteristics of the customer orders. In practical terms, price is ordinarily the determinative factor.
How should you vary your assessment for different product types?
You should consider the best execution obligation on a consistent basis, regardless of whether orders are executed on-exchange or off-exchange.
Where more than one execution venue or broker is available, you should consider their respective merits and document the basis for selecting the relevant venue(s) and/or broker(s). Designating a preferred execution venue or broker may be permissible if the time and costs incurred in considering other venues or brokers would outweigh any improvement in the quality of the execution of the order achieved by any such other venue or broker.
Where your CMI acts as principal, you should assess the fairness of the proposed price of the product, for example, on the basis of market data used in the estimation of the price and, where possible, by comparing it with the price of comparable products. The MAS’ guidance in this regard takes account of the fact that certain products, such as structured products and derivatives, may be illiquid in nature and that you may only be able to conduct price benchmarking for such products on the basis of limited reference data.
How do customer instructions affect your obligation of best execution?
Where your CMI places and/or executes an order following specific instructions from a customer, you will be regarded as having satisfied the obligation of best execution in respect of the part or aspect of the order to which the instruction relates.
You will, however, still need to achieve best execution with regard to execution factors that remain within your control. For example, if a customer has designated a financial institution to carry out the execution, you will still need to apply your CMI’s best execution policies and procedures for execution factors that are within your control, such as ensuring that customer orders are conveyed to the financial institution in a timely manner.
Which governance and review requirements apply?
Your board, or an appropriate management committee, will need to approve and periodically review the policies and procedures.
You should also periodically monitor your compliance with, and the effectiveness of, your CMI’s best execution policies and procedures. In doing so, you should assess whether your execution of transactions has delivered the best available terms to customers on a consistent basis. Such monitoring should reflect the nature, scale, and complexity of your CMI’s business. You may choose to employ various monitoring tools, for example by generating daily execution reports that compare executed trades against benchmarks such as the volume-weighted average price.
Which other customer-facing requirements should you apply?
Prior to the placement and execution of any customer order, you should provide the customer with sufficient information on your CMI’s best execution policies in clear and non-technical terms. This must be provided in writing (which may include an electronic medium, e.g. a website).