Since FIDLEG and MiFID II at the latest, “best execution” has become an established term in the investment world. But how does it look in practice? And what role do issuing platforms play in ensuring best execution? We will give you the answers to these questions here based on an example.
The new Financial Services Act (FIDLEG) will enter into force in 2020. It will heavily affect all players across the entire financial market – including asset managers. In order to improve customer protection, a number of new requirements affecting the investment business will be introduced along with the new law. In particular, FIDLEG provides a detailed regulatory record of principles for best execution.
Best execution means commitment to taking any and all reasonable steps in order to achieve the best possible result in the execution of an order. This means, for example, that investment advisors dealing in structured products must strive to offer their clients the best possible price. This requires greater transparency in pricing and for a direct price comparison to be made between different issuers.
deritrade allows financial services providers to create tailor-made structured products, and to have them issued by various providers. In order to find the best price for a product, the issuing platform enables a quick comparison between different issuers, thus offering a high degree of price transparency. In order to provide investors with an even wider range of products, investment advisors can now also have structured products issued by BNP Paribas. The major French bank is now the eight issuer on deritrade. Previous providers are UBS, Vontobel, Deutsche Bank, J.P. Morgan, Société Générale, and the Cantonal Babk of Zurich and Basel.
The opening up of the platform business therefore makes a valuable contribution to ensuring best execution. For example, deritrade offers an open-platform architecture that allows investment advisors to create tailor-made structured products from various issuers with little effort.
The following practical example provides a good illustration of how best execution can work in practice: A customer is interested in a structured product. The product – in this case a Barrier Reverse Convertible – can be simulated by the relationship manager on the deritrade issuing platform. They select various parameters that correspond to the needs and risk profile of the client.
Details of the request:
This product example describes a simulation that was carried out on April 17, 2019.
With just one click, the relationship manager receives indicative product conditions from several issuers that can then be compared with one another. The result: The differences between the various issuers are sometimes considerable. Issuers 6 and 7 have the lowest returns in the example scenario: The coupon amount totals 3.98% p.a., while at the other end of the scale, issuer 1 offers a coupon of 5.02% p.a.. Expressed in concrete figures, this means that with a capital expenditure of CHF 100,000, the investor would achieve a price advantage of CHF 1,040 over issuers 6 and 7 when investing with issuer 1.
Once the investor has decided on a product, the investment advisor can complete the product in a matter of seconds. The product is tailor-made by the issuer in question and delivered within the shortest possible time. This example illustrates that issuing platforms such as deritrade offer clients a choice and potentially better returns – and that is precisely what “best execution” is all about.
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