PHOENIX – The best execution rule, which took effect this week, may solidify a market shift concentrating retail customers in a few large firms, while others seek just to keep their institutional business running smoothly, market participants said.
Mark Maroney, Global Head of Fixed Income Municipals and Securitized Products at RBC Capital Markets, said his firm is still tracking down hundreds of sophisticated municipal market participant certifications for RBC’s institutional customers. MSRB Rule G-18 on best execution requires dealers, whether acting as agents or principals, to use "reasonable diligence" to determine the best market for a security and to then buy or sell the security in that market so the price for the customer "is as favorable as possible under prevailing market conditions."
Dealers are exempted from the rule if their customer is considered an SMMP under both Rules D-15, which defines an SMMP, and Rule G-48 on transactions with SMMPs. The rule does not apply to trades between dealers, but it covers customer trades that are cleared through another dealer. Dealers have been trying since the rule was approved last year to get their institutional customers to submit certifications that they were SMMPs not subject to the best execution rule, and in many cases have hired third parties to do that, Maroney said.
“We’re tracking down a couple hundred of these certifications,” he said. “The market likely has over a thousand if not more.”
“It was going to slow us down,” Maroney continued, explaining that not having the certification on file could stall or in some cases even prevent trades.
But Maroney said the problem was not really with the best ex rule, but rather with institutional clients waiting until the last minute and a sluggish spread of awareness of the issue in the market.
“I don’t think more time would have been the solution,” he said. “I think what the regulators provided is something the market can live with. It’s fair as it pertains to retail clients.”
John Vahey, director of federal policy at the Bond Dealers of America, said some of its member firms were still hearing back from clients about the SMMP certifications, but had not heard of a firm having a large percentage of them unaccounted for. MSRB executive director Lynnette Kelly said the MSRB has been actively engaged in market education about the best execution rule since it was first proposed. MSRB staff have spoken about best execution at 18 industry events since November 2014, Kelly said, reaching a cumulative audience of approximately 3,800.
Some market participants felt that the best execution rule’s effectiveness, and particularly the existence of the SMMP exemption, might just be leading to or continuing to highlight a divergence in the market’s structure. Fred Yosca, head of fixed-income trading at BNY Mellon Capital Markets, said he has not had a particular problem with the best execution rule generally because his business has evolved into an overwhelmingly institutionally focused one, with only about 5% of his business dealing with retail customers by his estimation.
“It really hasn’t had a big impact on the way we do business,” Yosca said, adding that he believes his firm obtained all its necessary SMMP certifications. “I’m fairly confident we do have them,” he said.
Matt Posner, principal at New York and Washington, D.C. based consulting firm Court Street Group, said the rule and its extra compliance costs for retail customers could end up pushing most remaining retail business to the largest Wall Street firms that have already made retail customers a cornerstone of their business models.
“It probably acts to consolidate the big five’s stranglehold over retail,” Posner said. “That is a structural change I think you will see.”
The MSRB released guidance on the rule in November, and sent dealers a reminder of the March 21 effective date earlier this month.
