The importance of best execution

The price tag for the FX platform raised eyebrows throughout the industry, but the technology benefits and client breadth State Street will gain from the acquisition cannot be ignored. Another feature, and one that seems to have been overlooked amid all the cost hubbub, is the best-execution support Currenex brings with its multibank executable streaming rates.

Best execution is a term that has been bandied about to the point of exhaustion. But the implications of not providing it is only really now being understood in forex. And here's why.

On November 1 this year, the Markets in Financial Instruments Directive (Mifid) comes into effect, replacing the existing Investment Services Directive. The aim of Mifid, much like its predecessor, is to ensure a fair market in financial services in the European Union, just with more areas covered.

The impression I get is that many banks and brokers until recently have buried their heads in the sand on this because of the product range covered by Mifid. A not-so-quick look at the list of financial instruments finds transferable securities, money market instruments and derivatives on securities, currencies, interest rates, commodities and credit included. But no spot FX – and therein lies the problem.

Although spot FX has not been specifically mentioned, it is actually still covered when traded off the back of trades involving Mifid-compliant products. This means anyone dealing with an investment firm regulated by Mifid has to show they are giving the client the best price for FX.

According to industry body Mifid Connect, under the best-execution requirements, investment firms have to take reasonable steps to obtain, when executing client orders, the best possible results for clients. This includes price, cost, speed, likelihood to execution and settlement, size, nature or any other consideration relevant to the execution of the order.

So for State Street, this means it will have to show it is getting the best FX deal for its client, which Currenex's technology will help to achieve. But what are you doing to prepare?

At the end of each month, we're going to provide a guide that we hope will help you meet the impending deadline. This week, we have an introduction from Chris Pickles, chair of the Mifid Joint Working Group in London (see related story, this issue).

Good luck!