Enhancing Order Execution Policies: A Detailed Overview of ESMA's New Regulatory Standards

Introduction

MiFID III, as entered into force on March 8, 2024, requires ESMA to develop regulatory technical standards (RTS) that specify criteria for evaluating the effectiveness of investment firms' order execution policies. The standards will impact how firms execute orders on behalf of both retail and professional clients.

In that respect, on April 10, 2025, the European Securities and Markets Authority (ESMA) published a Final Report on the rules explaining how investment firms should establish their order execution policies and assess their effectiveness.

In the draft Regulatory Technical Standards (RTS), ESMA specifies the rules, with the objective to enhance investment firms’ order execution and foster investor protection.

The RTS includes requirements on: 

• the establishment of an investment firm’s order execution policy; this includes the classification of financial instruments in which firms execute client orders and the selection of venues for the order execution policy;

• the investment firm’s procedures and criteria to monitor and regularly assess the effectiveness of its order execution arrangements and order execution policy;

• the investment firm’s execution of client orders through own account dealing; and

• how an investment firm should deal with specific client instructions.

In more detail but summarised form, the draft RTS deal with the following:

General Criteria for Order Execution Policies

Investment firms must define specific governance procedures for selecting execution venues. This includes:

• Ensuring venues are authorized by relevant authorities

• Maintaining an internal list that encompasses details such as the venue’s name, approval date, the classes of instruments, etc.

• Firms are required to implement robust valuation systems to ensure fair pricing, particularly for over-the-counter transactions. This is crucial for maintaining best execution standards, as mandated by regulatory articles

Selection of Execution Venues

When selecting execution venues, firms must consider client characteristics and needs. Key factors include:

• Order types and sizes relevant to clients

• Costs associated with execution, including trading fees and membership costs

• Comparisons of execution prices against reference datasets to ensure competitive pricing

If a firm opts for a single execution venue, it must justify how this choice consistently delivers the best outcomes for clients.

Order Routing Criteria

Investment firms are required to specify the criteria for routing orders across multiple venues to secure optimal results. This involves:

• Assessing cost implications, including fees and commissions

• Considering the nature of the order and the client's profile (Retail Vs Professional)

• Utilizing historical market data to inform decisions

For firms employing automated systems for order routing, clarity on system characteristics and safeguards to ensure best execution is necessary.

Managing Client Instructions

Investment firms must articulate how they handle specific client instructions that may deviate from their standard policies. This includes:

• Differentiating between general and specific instructions.

• Ensuring that any specific client request is processed accordingly, while other aspects of the order adhere to standard protocols

• Provide clients with the option to choose execution venues, ensuring transparency about potential costs associated with different venues.

Dealing on Own Account

When investment firms execute orders by dealing on their own account, they must outline:

• Strategies for ensuring best execution.

• Measures to identify and manage conflicts of interest.

• Risk assessment protocols for client orders.

This component is especially pertinent for transactions involving over-the-counter products, where price fairness must be rigorously evaluated.

Monitoring of the order execution policy

• Investment firms must monitor the effectiveness of their order execution policy to ensure compliance with established standards.

• Key elements to assess include the execution quality, price comparison against reference datasets, and adherence to predetermined thresholds for financial instruments.

• Firms should evaluate execution prices based on accepted deviations, traded volume percentages, and the number of client transactions meeting reference standards.

Periodic assessment of the effectiveness of the order execution policy

• Investment firms are required to periodically assess the effectiveness of their order execution policy at least annually and in response to specific triggers, such as compliance concerns or material changes affecting execution ability.

• The assessment must include an evaluation of costs and fees, monitoring results, market developments impacting execution quality, and the emergence of new execution venues and their features.

• If an investment firm uses a single execution venue, it must assess whether this choice continues to provide the best results for clients compared to alternative venues.

• Any identified deficiencies in effectiveness must lead to updates in the order execution policies and internal arrangements within a reasonable timeframe, based on the severity of the issues.

Implementation Timeline

The new regulation will enter into force 20 days after publication in the Official Journal of the European Union and will apply 18 months post-entry into force, estimated to be towards the end of 2026.

Conclusion

ESMA's new regulatory technical standards are critical for improving the order execution processes of investment firms across Europe. By adhering to these guidelines, firms can enhance client trust, ensure compliance, and ultimately deliver better financial outcomes. As the implementation timeline approaches, it is essential for firms to begin preparations to align their practices with the new standards.