15 September 2020
On 3 September 2020, the Monetary Authority of Singapore (“MAS”) issued a Notice and Guidelines setting out requirements for holders of a capital markets services licence, banks, merchant banks and finance companies that conduct the regulated activities of dealing in capital markets products, fund management and/or real estate investment trust (REIT) management under the Securities and Futures Act (collectively known as Capital Markets Intermediaries or “CMIs”) to establish and implement written policies and procedures to place and execute orders on the best available terms (“Best Execution”) and to place and execute comparable customers’ orders in accordance with the time of receipt of such orders. These requirements will take effect on 3 March 2022.
MAS has also issued a Notice requiring market operators which exercise discretion in placing or executing orders to establish and implement written policies and procedures on Best Execution and to place and execute comparable customers’ orders in accordance with the time of receipt of such orders. This Notice took effect from 4 September 2020 and applies only to approved exchanges and Singapore-incorporated recognised market operators (“RMOs”).
By way of background, MAS had conducted a public consultation from 20 November 2017 to 18 December 2017 on proposals to formalise MAS’ expectations for CMIs to have in place Best Execution policies and procedures and the requirement relating to handling of comparable customers’ orders in accordance with their time of receipt. On 3 September 2020, MAS issued its Response to feedback received from its consultation paper. Respondents were supportive of the proposals.
Best Execution requirements for CMIs
To implement the Best Execution requirements and requirement to handle comparable customers’ orders in accordance with their time of receipt, MAS issued the Notice on Execution of Customer’s Orders (SFA 04-N16) and the accompanying Guidelines which provide guidance on these requirements.
A CMI is required to establish and implement Best Execution policies and procedures taking into account a range of 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.
Order placement and/or execution policy
A CMI’s Best Execution policies and procedures should cover all capital markets products and all capacities in which the CMI is acting, regardless of whether it is acting as agent or principal. These policies and procedures are to be approved by the CMI’s board of directors or an appropriate management committee appointed by the board of directors, and periodically reviewed to ensure they remain relevant.
Best Execution should apply when executing customers’ orders directly on an execution venue or placing customers’ orders with another CMI or a person who is licensed, authorised, regulated or otherwise exempted in relation to dealing in capital markets products in a foreign jurisdiction, for execution. Should there be more than one execution venue or broker available to place or execute the customer’s order for a particular capital markets product, the CMI should consider the respective merits of each venue or broker, and document the basis for selecting the venue(s) or broker(s).
A CMI should consider its Best Execution obligation to achieve the best possible outcome on a consistent basis, regardless of whether customers’ orders are executed on-exchange or off-exchange (such as for cross trades). In its Response, MAS clarified that execution venues do not only refer to exchanges, and could encompass alternative venues where the execution of trades take place, such as dark pools, liquidity providers and market makers.
A CMI should place and/or execute a customer’s order following the specific instruction, if any, from the customer. When the CMI places and/or executes an order following specific instruction from the customer, it would be regarded as having satisfied its Best Execution obligations only in respect of the part or aspect of the order to which the customer’s instruction relates.
MAS will not subject a CMI to the Best Execution requirements when it is dealing with customers that are institutional investors on the basis that these customers are sufficiently sophisticated. In dealing with a customer who is an accredited investor or expert investor, a CMI should assess, and document its assessment, to determine the circumstances under which such a customer does not rely on the CMI to place or execute his order(s) on the best available terms. The 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.
A CMI should include in the Best Execution policies and procedures the factors which it has taken into account, and the considerations for determining the relative importance of the various factors, when placing and/or executing customers’ orders. In determining the relative importance and applicability of the factors, the following considerations should be taken into account:
- types of customers it serves, whether retail customers or otherwise;
- types of capital markets products for which it accepts, places or executes orders;
- characteristics of the execution venues or brokers to which the order can be directed; and
- characteristics of the customer’s orders.
A CMI has to establish adequate systems or arrangements to monitor periodically: (i) compliance with its Best Execution policies and procedures; and (ii) the effectiveness of its Best Execution policies and procedures. A CMI should assess if its execution of transactions has delivered the best available terms to its customers on a consistent basis. A CMI should implement monitoring systems or arrangements that are commensurate with the nature, scale and complexity of its business.
Where an automated order routing system is used, a CMI should monitor to ensure its infrastructure works as intended and does not result in unnecessary delays in the transmission of orders to the exchange.
Disclosure to customers on order execution
Before placing and executing customers’ orders, a CMI should provide sufficient information to its customers on its Best Execution policies. The information must be provided in writing, including via electronic means, provided customers are aware of the mode of communication. The CMI has to ensure the information is presented in a clear manner and avoids the use of technical jargon that customers may not understand.
Handling of comparable customers’ orders
In its Response, MAS has clarified that CMIs may include exclusions in their policies and procedures where it is not feasible or not in the best interest of customers to execute comparable customers’ orders in accordance with time of receipt.
Best Execution requirements for approved exchanges and Singapore-incorporated RMOs
The MAS Notice on Execution of Orders by Market Operators (SFA 02-N03) takes effect from 4 September 2020 and requires approved exchanges and Singapore-incorporated RMOs which may exercise discretion in placing or executing orders to establish and implement written policies and procedures to place and/or execute orders on the best available terms and to place and/or execute comparable customers’ orders in accordance with the time of receipt of such orders.
The following materials are available on the MAS website www.mas.gov.sg:
- MAS Notice SFA 04-N16 on Execution of Customer’s Orders
- MAS Guidelines to Notice SFA 04-N16 on Execution of Customers’ Orders
- MAS Notice SFA 02-N03 Execution of Orders by Market Operators
- Response to Consultation on Execution of Customers Orders
Allen & Gledhill Regulatory & Compliance
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