ESMA publishes Final Report and Final Draft RTS on investment firms’ order execution policies

RegCORE Client Alert | Capital Markets Union

QuickTake

On 10 April 2025, the European Securities and Markets Authority (ESMA) published its Final Report and (in Annex II thereto) the Final Draft regulatory technical standards (RTS) specifying the criteria for establishing and assessing the effectiveness of investment firms’ order execution policies (OEPs). Available here.Show Footnote These Final Draft RTS supplement principles established in the EU’s MiFID II Directive, Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU, as supplemented and amended, including by the MiFID II Review Directive.Show Footnote which mandates ESMA to enhance the regulatory framework governing best execution practices and thus enhance investor protection and market integrity in the EU.

The MiFID II Review Directive, which amends the original MiFID II Directive, was published in the Official Journal of the European Union on 8 March 2024 and entered into force on 29 March 2024 with a transposition deadline of 29 September 2025. The MiFID II Review Directive mandated ESMA to develop RTS specifying the criteria for establishing and assessing the effectiveness of investment firms' OEPs. These criteria must consider whether orders are executed on behalf of retail or professional clients and include factors such as the choice of execution venues, the frequency of policy assessments and the identification of financial instrument classes.

The Final Draft RTS aim to provide clarity and harmonise the criteria investment firms must consider to ensure they achieve the best possible result for their clients when executing orders. The implementation of the Draft Final RTS may have significant implications for certain investment firms. Firms will need to update their OEPs to comply with the detailed requirements set out in the RTS. This includes providing more granular information about execution venues, monitoring execution quality using high-quality data, and conducting regular assessments of policy effectiveness. In accordance with existing requirements firms must also ensure that their policies are clear and understandable to clients and obtain prior consent for any changes. It should be noted that the rules on how and when consent can be obtained i.e., in particular whether explicit consent is required from retail clients or whether implied (deemed) consent will suffice is subject to a range of factors specific to a given relationship that might require a further assessment. The same also applies in setting a cut off date as to when orders/transactions are subject to old and when they are subject to new terms in OEPs.Show Footnote

This Client Alert delves into the key aspects of the Final Draft RTS, the implications for investment firms and the anticipated next steps. This Client Alert should be read in conjunction with earlier analysis on ESMA’s Consultation Paper and the earlier version of the RTS that also highlighted developments as well as shortcomings amongst various national competent authorities (NCAs). Available here and in respect of MiCAR here.Show Footnote

A recap on key regulatory principles

The Final Report reminds readers of the application of a number of existing regulatory requirements, which the Final Draft RTS’ provisions then expand on. It should be equally noted that the RTS’ requirements on OEPs apply both to orders (i) in traditional financial instruments, which are categorised as such under MiFID II, as amended and supplemented, as well as to (ii) those crypto-assets that, as a result of the EU’s Markets in Crypto-Assets Regulation (MiCAR), are categorised as financial instruments and thus subject to MiFID II and the body of traditional financial services rules, as amended to cater for distributed ledger and blockchain specifics where relevant.

As a recap, these existing requirements include:

Best execution requirements

Article 27 of MiFID II sets out the best execution requirements, which obligate investment firms to take all sufficient steps to obtain the best possible result for their clients when executing orders. This includes considering factors such as price, costs, speed, likelihood of execution and settlement, size, and nature of the order.

For retail clients, the best possible result is determined in terms of total consideration, which includes the price of the financial instrument and all execution-related costs. For professional clients, the best possible result may be determined by reference to other factors, depending on the specific circumstances of the order and the client. Investment firms must establish and implement effective arrangements, including an OEP, to comply with these requirements.

OEP criteria

Investment firms must include detailed information in their OEPs about the different venues where client orders are executed and the factors affecting the choice of execution venue. This information must be clear, detailed, and easily understood by clients. Firms must obtain prior consent from clients to their OEP and inform them if orders may be executed outside a trading venue. Additionally, firms must monitor the effectiveness of their order execution arrangements, OEPs and other related policies regularly and notify clients of any material changes.

Selection of execution venues

The selection of execution venues is a critical aspect of achieving best execution. Investment firms must consider a range of factors, including the offered price, liquidity, and transaction costs. Firms are required to justify their choice of execution venues and demonstrate that they consistently obtain the best possible result for clients. This includes providing documented analysis and avoiding generic disclosures.

As explored below the Final Draft RTS also addresses (but crucially does not prevent) the use of a single execution venue, requiring firms to justify how this ensures the best possible result for clients and to monitor the effectiveness of this arrangement.

Monitoring and assessment

Investment firms must continuously monitor their execution quality and arrangements to ensure compliance with their OEP. The Final Draft RTS specifies that firms must use high-quality reference datasets, such as data from consolidated tape providers (CTPs), to assess execution prices. Firms must define thresholds for acceptable execution quality and initiate reviews if these thresholds are breached. The periodic assessment of the OEP's effectiveness must be conducted at least annually and whenever material changes occur that could affect execution quality.

Dealing on own account

Firms that execute client orders by dealing on their own account, including back-to-back trading are subject to specific conditions. Firms must outline in their OEP how they ensure a fair price for financial instruments executed through own account dealing. This includes using market prices, prices of similar instruments, or internal pricing models based on reliable data. The Final Draft RTS also emphasise the importance of managing conflicts of interest and ensuring that own account dealing does not compromise the best execution obligations.

Client instructions

Firms are required to assess the treatment of specific client instructions, which can impact the execution quality. Firms must differentiate between orders with and without specific instructions and ensure that only the specified parts of the order are treated as client instructions. The Final Draft RTS also addresses the pre-selection of execution venues, allowing firms to pre-select a venue but requiring them to ensure that this does not constitute a specific client instruction unless the client chooses a different venue.

Under the Final Draft RTS, ESMA introduces several significant changes and enhancements to the existing regulatory framework governing investment firms’ OEPs.

Key takeaways from the Draft Final RTS

One of the primary areas of focus in the Draft Final RTS is the enhancement of governance and transparency requirements. Investment firms are now mandated to maintain an internal list of approved execution venues. This list must detail the governance procedures for the selection of these venues and specify the classes of financial instruments for which they are used. Additionally, firms must provide a justification for the selection of a single execution venue for a given class of financial instruments, ensuring that this choice “consistently” achieves the best possible result for clients.

Where a specific client order can be executed on several venues, the Final Draft RTS clarify that the OEP  should include information on the obligatory and discretionary factors the investment firm considered when making the order routing decision. Investment firms should not use an automatic order routing system if the firm is aware prior to the execution of an order that using such a system may have an adverse impact on the execution quality. This again puts an onus on monitoring and being able to evidence and justify that there are not adverse impacts.

Another critical aspect of the RTS is the requirement for a more granular classification of financial instruments. As mentioned in the Final Report, a majority of respondents to the Consultation Paper expressed concerns with the categorisation of classes of financial instruments based on the Classification of Financial Instruments (CFI) methodology. They stated that this would lead to many classes, some mentioned over 70 potential classes of financial instruments which would mean a high administrative burden. Moreover, these respondents noted that the criterion of the country of primary listing would further increase that burden. In contrast, some respondents did support the CFI methodology and highlighted inter alia that the CFI methodology allowed for better and more granular analyses. A majority of respondents noted that the amount of information on the classes of financial instruments might be difficult to understand for clients due to the proposed granularity. Some respondents also referred to the deletion of RTS 27 and RTS 28 by the MiFID II Review Directive and stated that the introduction of new disclosure requirements would go against the rationale behind that deletion. The Final Report thus clarifies that the CFI is for internal purposes only and not intended for disclosure to clients. Accordingly, the new standards in the Draft Final RTS mandate that firms identify ten common classes of financial instruments. Where necessary, firms must also identify additional subclasses to ensure effective monitoring and assessment of execution quality. This granular approach aims to prevent the risk of unfavourable execution quality for certain products within a broader class going undetected.

The Final Draft RTS also emphasise the need for robust monitoring and assessment mechanisms. Investment firms are required to implement systematic and robust checks to monitor the effectiveness of their OEPs. This includes the use of high-quality reference datasets, potentially sourced from CTPs, to compare execution prices and ensure compliance with best execution obligations. Firms must set predetermined thresholds for execution quality indicators and conduct periodic assessments, at least annually, to evaluate the effectiveness of their OEPs and its order execution including by evaluating selected execution venues and established order execution (including exclusivity) arrangements and whether this meets order execution quality standards. ESMA’s view is that this continuous monitoring is crucial for identifying and correcting any deficiencies in execution quality and taking (immediate) steps to rectify shortcomings.

Specific client instructions and dealing on own account are also addressed in the Final Draft RTS. The standards provide detailed guidance on handling specific client instructions, emphasising the need for transparency and safeguards to prevent practices that could impair clients' ability to make informed decisions. For firms executing orders by dealing on own account, the RTS outline the steps to ensure fair pricing and manage conflicts of interest. This includes the use of internal pricing models when market prices are unavailable, ensuring that the prices proposed to clients are fair and reflective of market conditions.

The RTS introduce a degree of proportionality and flexibility in certain requirements, allowing firms to tailor their monitoring and assessment processes based on their size and the complexity of their activities. This approach aims to balance regulatory compliance with operational feasibility, ensuring that smaller firms or those with less complex operations are not unduly burdened by the new requirements.

In terms of further key differences between the Consultation Paper and the Final Report as well as the draft RTS (as originally proposed in the Consultation Paper), it should be noted that the Draft Final RTS:

• Specified in greater detail that investment firms must consider criteria impacting the total consideration for retail clients, aligning with directive requirements and enhancing client protection;
• removed the detailed explanation of the process for assessing and comparing results for the client (including for third-country domiciled execution venues), potentially simplifying the monitoring obligation but also omitting important procedural information;
• added a new criterion regarding the factors determining the choice of execution venues included in the OEP, enhancing the comprehensiveness of the criteria;
• specified that the criteria for establishing and assessing the effectiveness of the OEP should take into account whether the orders are executed on behalf of retail or professional clients, ensuring the policy considers the type of clients for whom the orders are executed;
• added a new criterion regarding the frequency of assessing and updating the OEP, emphasising the importance of regularly reviewing and updating the policy;
• introduced a new section detailing the roles of senior management and the compliance function in ensuring compliance with MiFID II obligations, highlighting the collaborative effort required within investment firms;
• added details specifying the conditions under which firms can select a single execution venue, including transparency of exclusive agreements and cost comparisons with alternative venues, ensuring transparency and accountability as well as periodic assessment of single execution venue strategies, ensuring that they remain effective and that alternatives are considered;
• detailed the role of an investment firm’s management function’s role and that of the compliance function, ensuring the latter is not burdened with decision-making responsibilities, which helps maintain its focus on oversight and regulatory adherence;
• provided more precise guidance on ensuring price fairness in OTC transactions, aligning with regulatory requirements;
• revised the text to provide a clearer and more actionable description of the firm's responsibilities in managing conflicts of interest when executing client orders;
• clarified the requirements for investment firms that outsource to third parties under the MiFID II framework, ensuring compliance with outsourcing standards;
• emphasised the importance of maintaining appropriate records in a machine-readable format to facilitate regulatory supervision and enforcement, supporting investor protection and market integrity; and
• specified the conditions under which third-country authorities are relevant, making the respective requirements more specific.

While all NCAs are required to adopt the Draft Final RTS and follow ESMA’s supervisory expectations, some NCAs may also provide their own further guidance addressed to respective market participants that fall within “their” mandate. While such further guidance may not diverge from what ESMA has set out, it might in certain circumstances, impact some investment firms in how they structure, document and evidence order execution.

Outlook and next steps

The Draft final RTS have now been submitted to the European Commission for adoption. The European Commission is expected to decide on the adoption within three months, as per Article 10 of the Regulation establishing ESMA. Regulation (EU) No 1095/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Securities and Markets Authority), amending Decision No 716/2009/EC and repealing Commission Decision 2009/77/EC.Show Footnote Once adopted, the RTS will enter into force 18 months after publication in the Official Journal of the European Union, providing firms with a transition period to update their OEPs and internal arrangements.

A number of firms may need to undertake a comprehensive review of their current OEPs and practices as well as market-facing documentation to ensure compliance with the final RTS and ESMA’s supervisory expectations. This includes updating internal governance procedures, enhancing transparency in execution venue selection, and implementing robust monitoring and assessment mechanisms. Firms may also need to evaluate the capabilities of their existing IT and data analytics systems to meet the new requirements.

NCAs are expected to apply the harmonised criteria set out in the RTS, enabling more effective supervision and enforcement of best execution obligations. Firms should be prepared for increased scrutiny and potential enforcement actions if they fail to comply with the new standards. It is also highly expected that ESMA may launch common supervisory actions or other forms of targeted (on-site) inspections together with NCAs to review how firms are implementing the new requirements in their OEPs along with the structuring and execution of their activities.

The new RTS represent a significant step towards enhancing the regulatory framework for best execution under MiFID II. Investment firms should act promptly to align their policies and practices with the new requirements, ensuring they can demonstrate compliance and continue to achieve the best possible results for their clients. The transition period provides a valuable opportunity for firms to implement necessary changes and strengthen their OEPs and operational frameworks in line with ESMA's expectations.

About us

PwC Legal is assisting a number of financial services firms and market participants in forward planning for changes stemming from relevant related developments. We have assembled a multi-disciplinary and multijurisdictional team of sector experts to support clients navigate challenges and seize opportunities as well as to proactively engage with their market stakeholders and regulators.

Moreover, we have developed a number of RegTech and SupTech tools for supervised firms, including PwC Legal’s Rule Scanner tool, backed by a trusted set of managed solutions from PwC Legal Business Solutions, allowing for horizon scanning and risk mapping of all legislative and regulatory developments as well as sanctions and fines from more than 1,500 legislative and regulatory policymakers and other industry voices in over 170 jurisdictions impacting financial services firms and their business.

Equally, in leveraging our Rule Scanner technology, we offer a further solution for clients to digitise financial services firms’ relevant internal policies and procedures, create a comprehensive documentation inventory with an established documentation hierarchy and embedded glossary that has version control over a defined backward plus forward looking timeline to be able to ensure changes in one policy are carried through over to other policy and procedure documents, critical path dependencies are mapped and legislative and regulatory developments are flagged where these may require actions to be taken in such policies and procedures.

The PwC Legal Team behind Rule Scanner are proud recipients of ALM Law.com’s coveted “2024 Disruptive Technology of the Year Award”.

If you would like to discuss any of the developments mentioned above, or how they may affect your business more generally, please contact any of our key contacts or PwC Legal’s RegCORE Team via de_regcore@pwc.com or our website.