The Nigerian Stock Exchange, NSE is proposing a new order handling and best execution rules to ensure “Dealing Members strive to obtain the best deal for clients when executing clients’ orders”.
Apparently, the NSE said it “observed that some Dealing Members either do not have effective Best Execution policies, or do not follow the principles outlined in their Best Execution Policy when handling clients’ transactions, hence the need to develop the Order Handling and Best Execution Rules”.
The NSE clarified that the rule will “address and provide for best execution principles and criteria, the role of price, Dealing Members’ obligations with regard to the execution of client’s’ orders, following clients’ specific instructions, clients’ order handling, aggregation and allocation of orders, aggregation and allocation of clients’ transactions with Dealing Member’s proprietary account, audit trail requirements, and sanctions in the event of default”.
The NSE said “The Rules will guide Dealing Members on their obligations, from the receipt of clients’ mandates till when the mandates are executed. III.
Stakeholders in the stock market are enjoined “to participate in its rule making process. Your participation is required by way of reviewing the draft Rules and providing your comments thereon”.
All comments should be set forth in a WORD document attached to an electronic mail to Mr. Oluwatoyin Adenugba of the Rules and Interpretation Department of The Exchange at oadenugba@nse.com.ng.
The amendment is subject to the approval of the National Council of The Exchange and the Securities and Exchange Commission.
See the proposed Amendment below:
RULEBOOK OF THE NIGERIAN STOCK EXCHANGE, 2015 (DEALING MEMBERS’ RULES) PROPOSED RULES ON ORDER HANDLING AND BEST EXECUTION
Executive Summary
The objective of the proposed Rules on Order Handling and Best Execution is to ensure that
Dealing Members strive to obtain the best deal for clients when executing their orders.
The proposed rules aim to guide Dealing Members on their obligations through the life cycle of a
client’s order, right from the receipt of mandates through until execution. The rules are also to
enhance investors’ protection and confidence in the Nigerian capital market.
The text of the proposed rules on Best Execution and Order Handling are set forth below:
New Rule:
Definition
Execution Factors includes price, costs, speed, likelihood of execution and settlement,
size, nature, fill rate, price improvement, market impact or any other
consideration relevant to the execution of an order.
Discretionary Account an investment account that allows a Dealing Member to buy and sell
securities without a requirement that the client specific consent to
individual transaction. To do this, the brokerage agreement executed
by the client with the Dealing Member shall include a discretionary
disclosure clause as documentation of the client’s consent to the
Dealing Member’s operation of the account in this manner. However,
the Dealing Member shall make buy and sell decisions in accordance
with the client’s stated investment goals.
Best Execution Principle
- Every Dealing Member shall at all times when acting for a client in the purchase or sale of
securities, adhere to the best execution principle by taking reasonable steps to obtain the
best available result for the client within the shortest time frame, provided that the
Dealing Member shall at all times act in accordance with the terms and conditions of the
order from the client.
Authorised Use Only – PUBLIC
- Where a Dealing Member deals on its proprietary account and the counter party to the
transaction is the same Dealing Member’s client, to ensure compliance with the best
execution principle, the transaction shall be treated as an execution of the client’s order,
and not the Dealing Member’s.
- The Dealing Member’s obligation to deliver the best possible result when executing client
orders shall apply to all types of securities.
- The Dealing Member shall apply its best execution obligations in a manner that takes into
account the different circumstances associated with the execution of orders related to
particular types of securities.
Best Execution Criteria
- When executing a client’s order, a Dealing Member shall take into account the following
criteria for determining the relative importance of the execution factors:
- the characteristics of the client, including the categorization of the client as retail
or institutional;
- the characteristics of the client order i.e. Good Till Month (GTM), Day Order, Good
Till Open (GTO), Fill or Kill (FOK), All or None; and
iii. the characteristics of securities that are the subject of that order, including
expected return, risk, liquidity, and volatility.
The Role of Price
- Where a Dealing Member executes an order on behalf of a retail client, the best possible
result shall be determined in terms of the total consideration, representing:
- the price of the securities;
- the costs related to execution, which shall include all expenses incurred by the
client that are directly related to the execution of the order;
iii. fees for execution, clearing and settlement; and
- any other fees paid to third parties involved in the execution of the order.
- When executing a retail client’s order for discretionary investor accounts, a Dealing
Member shall take into consideration all factors that will allow it to deliver the best
possible result in terms of the total consideration, representing:
- the price of the securities and the costs related to execution;
- speed;
iii. likelihood of execution and settlement;
- the size and nature of the order;
- market impact; and
Authorised Use Only – PUBLIC
- that any other implicit transaction costs may be given precedence over the
immediate price and cost consideration only, as long as they are instrumental in
delivering the best possible result in terms of the total consideration to the retail
client.
Order Execution
- Clients’ order execution includes:
- The execution of orders on behalf of clients; and
- The transmission of client orders to other entities for execution when providing
the service of reception, and transmission of orders.
- Each Dealing Member shall:
9.1 Establish and implement effective arrangements for achieving the best possible
result for its clients.
9.2 Establish and implement an order execution policy to allow it to obtain, for its
client orders, the best possible result in accordance with that obligation.
9.3 Provide appropriate information to all its clients about its order execution policy,
and display its order execution policy on its website at all times.
9.4 Provide its clients with its order execution policy in good time prior to the
provision of its services.
9.5 Establish and implement an order execution policy which shall contain:
- an explanation of the relative importance that the Dealing Member
assigns, in accordance with the execution criteria, to the execution factors,
or the process by which the Dealing Member determines the relative
importance of those factors;
- a clear and prominent warning that any specific instructions from a client
may prevent the Dealing Member from taking the steps that it has
ordinarily designed and provided in its execution policy to enable it obtain
the best possible result for the execution of those orders.
9.6 Determine the relative importance of the execution factors or establish the
process by which it determines the relative importance of the factors.
9.7 Apply its execution policy to each client order.
Authorised Use Only – PUBLIC
9.8 Monitor the effectiveness of its order execution arrangements and policy on a
regular basis in order to identify and, where appropriate, correct any deficiencies.
- Each Dealing Member’s execution policy shall determine the relative importance of each
of the execution factors or establish a process by which it will determine the relative
importance of the execution factors. The relative importance that a Dealing Member
gives to those execution factors shall be designed to obtain the best possible result for
the execution of its clients’ orders.
- Each Dealing Member shall:
11.1 Notify its clients of any change to its order execution arrangements or execution
policy.
11.2 Review its execution policy, as well as its order execution arrangements annually.
The review shall also be carried out whenever a material change occurs that
affects the Dealing Member’s ability to obtain the best possible result for the
execution of its clients’ orders on a consistent basis.
11.3 Be able to demonstrate to its clients and The Exchange, upon request, that it has
executed its clients’ orders in accordance with its execution policy. The Dealing
Member shall comply with all audit trail requirements as provided in these Rules.
11.4 Act in the best interests of its clients whilst receiving and transmitting its client’s
orders to other entities for execution.
Following Clients’ Specific Instructions
- Each Dealing Member shall:
12.1 Execute its client’s specific instructions.
12.2 Take all reasonable steps to obtain the best possible result for a client whilst
executing an order, or a specific aspect of an order.
- Where a Dealing Member executes an order following specific instructions from its client,
the Dealing Member shall be deemed to have satisfied its best execution policy only in
respect of the part or aspect of the order to which the client’s specific instructions relate.
The specific instructions shall not be treated as being applicable to any other parts, or
aspects of the client’s orderin relation to the Dealing Member’s best execution obligation,
except there is proof to the contrary.
Authorised Use Only – PUBLIC
- No Dealing Member shall induce its client to issue instructions to execute an order in a
particular way, by expressly indicating or implicitly suggesting the content of the
instruction, when the Dealing Member ought reasonably to know that such instruction is
likely to prevent the best possible result for that client.
Client Order Handling
- Every Dealing Member shall implement procedures and arrangements which provide for
the prompt, fair and expeditious execution of clients’ orders.
- Whilst carrying out client orders, each Dealing Member shall:
- ensure that orders executed on behalf of clients are promptly and accurately
recorded and allocated; and
- inform its client about any material difficulty relevant to the proper execution of
orders promptly upon becoming aware of the difficulty.
- No Dealing Member shall misuse information relating to pending client orders, and each
Dealing Member shall take all reasonable steps to prevent the misuse of such information.
Aggregation and Allocation of Orders
- No Dealing Member shall execute a client’s order in aggregation with another client order
unless the following conditions are met:
- the aggregation of orders and transactions will not work against acceptable fair
allocation methodology. Acceptable fair allocation methodologies shall be
published from time to time by The Exchange.
- an order allocation policy is established and effectively implemented, providing in
sufficiently precise terms for the fair allocation of aggregated orders and
transactions, including how the volume, price and/or time of receipt of orders
determines allocations and the treatment of partial executions.
- Where a Dealing Member aggregates a client’s order with one or more other orders and
the aggregated order is partially executed, the Dealing Member shall allocate the trades
in accordance with its order allocation policy.
Aggregation and Allocation of Client Transactions with Dealing Member’s Proprietary Account
- No Dealing Member shall aggregate a client’s order with a transaction for the Dealing
Member’s proprietary account.
Authorised Use Only – PUBLIC
Audit Trail Requirements
- Dealing Members shall establish a system for order tracking and monitoring. This is to
ensure that there is an end to end trail through the life cycle of an order.
- Evidence of audit trail on all modified, cancelled and executed orders,shall be maintained
in the Dealing Member’s system. This is required to provide visibility into the entire life
cycle of an order. To facilitate this, Dealing Members shall ensure that they have time
stamps to record timing of receipt of orders.
Sanctions
- Any Dealing Member that fails to maintain an audit trail, shall be liable to pay a fine of
not less than Three Hundred Thousand Naira (N300,000.00).
- Any Dealing Member that contravenes any of the above Rules, save for the Rule that
requires Dealing Members to maintain an Audit Trail, shall be liable to pay a minimum
fine of N250,000.00 (Two Hundred and Fifty Thousand Naira) only in addition to any other
penalties as may be prescribed from time to time by The Exchange.
