• Background
• Regulatory requirement to have an Internal Execution Policy & Customer Disclosure
• Internal Execution Policy
• Customer Disclosure
• When is customer consent required?
• Prior Consent to the Execution Policy
• Prior express consent when trading outside a RM or MTF
• Execution Approach
• Execution Factors
• Execution Venue Selection
• Publication of Limit Orders
• Audit Trail and Monitoring
• Review requirement of the execution policy
• Demonstrating compliance with execution policy
• Monitoring of the execution policy
• Miscellaneous
• Specific Instructions
• System Failure
• APPENDIX A
• APPENDIX B
• Market orders
• Non market orders
• European
• North American
• Asia and Pacific
• Contracts For Difference & Financial Spread Betting
• APPENDIX C
• Trade Diagrams
• APPENDIX D
• LIST OF SERVICES AND ACTIVITIES AND FINANCIAL INSTRUMENTS (AS LISTED IN ANNEX 1 OF MIFID)
• APPENDIX E
• FINANCIAL INSTRUMENTS (AS LISTED IN ANNEX 1 OF MIFID)

The Markets in Financial Instruments Directive (MiFID) is the EU Directive that has replaced the Investment Services Directive (1993).

MiFID forms part of the Financial Services Action Plan (FSAP). The purpose of the FSAP, and therefore MiFID, is to create an integrated structure for a pan-European market for investment services. In particular, MiFID has simplified cross-border trading in European securities for financial institutions and investors by improving the passport rights for businesses and by extending them to new products and services. In recognising new types of venue and creating a common best execution regime, greater competition between trading venues is expected.

MiFID refined the regime for recognising Regulated Markets (“RM”), introduced the concept of Multi-Lateral Trading Facilities (“MTF”) and recognised that RMs and MTFs represent the same organised trading functionality. Additionally, the role of market makers and liquidity providers is recognised and particular obligations are placed upon certain firms, to be known as Systematic Internalisers (“SI”), when they are providing off-market quotes against their own capital in a defined class of liquid shares. 

Furthermore, MiFID has redefined client classification to client categorisation. Under MiFID customers are categorised in order of sophistication – retail customers, professional customers and eligible counterparties. Each category determines the level of protection afforded to the customer, with retail customers receiving the highest level of protection.  All NatWest Stockbrokers (NWS) customers are categorised as Retail Client's unless they have been separately advised differently.

Although the regulatory environment has changed, in practice this will not materially affect the way in which NWS executes customer transactions. However, the current regulatory requirement is to take all reasonable steps to obtain, when executing orders, the best possible result for the customer taking into account the execution factors (“Best Execution Obligation”) and this replaces the previous regulatory regime that placed price as the only factor that needed to be considered to satisfy best execution.

There are eight investment services and activities as defined by MiFID that have now been incorporated into FSA rules and regulations. Of these NWS undertakes two, namely, it receives and transmits orders as well as executing orders. A full list of all MiFID investment services and activities and financial instruments can be found in Appendices D and E.

The difference between the two investment services and activities is material when considering best execution and this is set out within this policy.

NWS is required to establish, implement and maintain an order execution policy (“Execution Policy”) detailing the comprehensive approach to meeting the best execution obligation, as defined within MiFID.

The Customer Disclosure (“Disclosure”) is a customer-focused communication. The purpose of this is to provide customers with sufficient appropriate information about NWS’s Execution Policy to enable them to make an informed decision about trading with NWS. This requirement is intended to provide investor protection and promote market efficiency as it encourages customers and potential customers to review certain key information about a firm’s execution arrangements.

The Disclosure includes the following:
An account of the relative importance NWS assigns, in accordance with the execution criteria, to the execution factors, or the process by which NWS determines the relative importance of those factors;
A reference to where a list of the execution venues on which NWS places significant reliance in meeting its obligation to take all reasonable steps to obtain on a consistent basis the best possible result for the execution of customer orders, can be located;
A clear and prominent warning that any specific instructions from a customer may prevent NWS from taking the steps that it has designed and implemented in its execution policy to obtain the best possible result for the execution of those orders in respect of the elements covered by those instructions.

The Disclosure can be found within the Customer Terms and Conditions (“Terms and Conditions”). This document is the contract between NWS and the customer. When opening an account with NWS, all customers agree to be bound by the content of the Terms and Conditions.

When executing orders on your behalf, we will take all reasonable steps to obtain the best possible result for you by considering a number of factors which include price, costs, speed, likelihood of execution and settlement, size, nature and any other consideration which we consider is relevant. We will ordinarily give the price and the costs relating to the execution of your order the highest importance in obtaining the best result for you, although there may be circumstances where we reasonably determine that another factor is more important.

A list of the Execution Venues that we use can be found on our website at www.rbs-sharedealing.co.uk. This list is not exhaustive but it comprises those Execution Venues on which we place significant reliance.

When you provide us with a specific instruction as to the execution of an order that cannot be carried out in accordance with our Execution Policy, our Execution Policy may not apply and we will execute your order in accordance with your specific instructions. 

When executing orders for customers, NWS provides customers with the Disclosure in a Durable medium, prior to the provision of the service that we offer. When receiving and transmitting orders for execution there is no equivalent provision. The MiFID requirement for prior disclosure about the firm’s order execution policy relates to and supports the MiFID requirement for the firm to obtain its client’s prior consent to the order execution policy (see next section). NWS both execute and receive and transmit orders, and therefore it applies the higher standard to both scenarios.

The definition of a Durable medium states that the communication has to be addressed personally to the recipient, it must enable the recipient to store information in a way accessible for future reference for an adequate period of time and it must be appropriate to the context in which the business is carried on. Therefore, when opening an account on the telephone, the Customer Disclosure is read to the customer and the customer is then asked if they are happy to proceed on this basis. Customers will also be notified that the Disclosure is present in the Terms and Conditions and that this is for their future reference.

When opening an account online (or by post), customers have access to the Terms and Conditions and therefore the Disclosure is available to them prior to the provision of the service that we offer. Furthermore, customers are asked to declare that they have read, understood and agree to be bound by the Terms and Conditions prior to opening the account.

When executing orders for customers, NWS will obtain the prior consent of its customers to the execution policy. This demonstrates the importance of communicating a Disclosure that is both accurate and appropriate for customers to make an informed decision.

When receiving and transmitting orders for execution there is no such equivalent provision. NWS both execute and receive and transmit orders, and therefore it applies the higher standard to both scenarios.

Prior consent in the above situation can be tacit. Therefore, existing customers having received the Disclosure are deemed to have consented when they place their first trade after 1st November 2007. It is considered that they have read and understood the Disclosure and agreed to the content of the Execution Policy.

Consent from new customers is explained in the previous chapter under the heading, “when must the disclosure be communicated”.

NWS will obtain prior express consent from its customers before proceeding to execute their orders outside a RM or MTF. The instances in which this might occur include trading with a SI and trading agency crosses and broker-to-broker trades.

Prior express consent in the above situation cannot be tacit. Consent must involve some form of action by the customer, e.g. click on a website or verbally consenting.

It is considered that instances where prior express consent would be required would be minimal. Agency cross and broker-to-broker trades are relatively rare occurrences. Furthermore, NWS has a policy to not ordinarily trade with SIs unless exceptional circumstances dictate otherwise. Should one of these instances occur such orders would be received via the telephone rather than the online facility due to the nature of the order, i.e. size and stock selection. Therefore, consent will be requested via the telephone and recorded on the scratchpad.

The Execution Obligation applies to all types of financial instruments. Due to differences in the structure of these instruments and the differences in the market structures, it is difficult to apply a uniform approach to best execution that would be effective for all the different types of financial instruments. Therefore, the best execution obligation should be applied so that it takes account of the different circumstances associated with order execution for particular types of financial instruments.

For further details on the execution processes applied to the range of financial instruments that NWS trade in, consult Appendix B.

The Best Execution Obligation (as previously mentioned) is to take all reasonable steps, when executing orders, to obtain the best possible result for customers, taking into account the execution factors, listed below:
Price at which the order could be executed;
Costs that will be payable by the customer as a result of the execution of the order;
Speed at which the order will be executed;
Likelihood that the order will be executed;
Size of the order;
Nature of the order, i.e. buy, sell, raise, or invest;
Likelihood of settlement of the order;
Other considerations relevant to the execution of the order.

NWS will of course consider each of the above factors (“Execution Factors”). In order to assist NWS in determining the relative importance of the execution factors, it is obliged to consider the following criteria (“Execution Criteria”):
The characteristics of the customer (e.g. nature of execution services provided to the customer, frequency of trading, provision of any value-added services);
The characteristics of the transaction in question;
The characteristics of the financial instrument; and
The characteristics of the available execution venues (such as the liquidity available for the financial instruments traded and the creditworthiness of the venue).  

NWS will ordinarily determine the best possible result in terms of total consideration, representing the price of the financial instrument and the costs related to execution, including all expenses incurred by the customer that are directly related to the execution of the order. This approach is consistent with the FSA rules in this respect.

Notwithstanding the above, speed, likelihood of execution and settlement, the size and nature of the order and market impact may be given precedence over the immediate price and cost consideration, but only insofar as they are instrumental in providing the best possible result in terms of the total consideration to the customer. For example, this may be justified for a particularly large order in a relatively illiquid share. All orders will be dealt with in a prompt, fair and expeditious manner.

When there is more than one competing venue to execute an order for a financial instrument, NWS’s own commissions and costs for executing the order must be taken into account when assessing and comparing the results that would be achieved by executing the order on each execution venue listed in this execution policy capable of executing that order.

The Execution Factors will also contribute to NWS’s decision when selecting execution venues for executing their orders.

When selecting execution venues, NWS would select those execution venues that are competitive primarily on price, cost, speed of execution, likelihood of execution and size of the order. NWS polls a number of Retail Service Providers (RSPs) for prices when executing customer orders and it is important that these trades can be executed at the best available price and as quickly as possible.

When executing an order manually; contacting the market by telephone, all factors enter the equation when influencing the decision as to what execution venue is selected.

RMs and MTFs are classified as execution venues under MiFID and are the focal point of supply and demand from investors and generally provide the best liquidity conditions for buying and selling financial instruments. 

In some cases only one execution venue will be available for the execution of orders in certain financial instruments.  Where more than one execution venue exists, NWS will select the most appropriate venue after taking into consideration the execution factors.  Appendix A details those execution venues that enable NWS to obtain on a consistent basis the best possible result for the execution of customer orders. The list is not exhaustive and NWS may use other execution venues from time to time in order to satisfy its best execution obligation.

There is now a requirement on firms when receiving a client limit order that is not immediately executable under prevailing market conditions, to take measures to facilitate the earliest possible execution of that order by making public immediately that order in a manner that is easily accessible to other market participants, unless a client expressly instructs otherwise. However, this is not required for orders larger than normal market size.

NWS has made reference to this requirement in its Terms and Conditions and to ensure that it remains compliant with the requirement the following process will be followed.

Having selected the option to place a limit order via the website, the customer will be presented with a message on the trading screen. The message will instruct the customer that by submitting their order details to us they are expressly instructing us to not publish their limit order. To assist them in making their decision they will be prompted to access a page on the website (via a link) that will provide them with more information.

Should the customer consider that publication of their limit order would facilitate its execution they will be provided with a telephone number to contact NWS, i.e. limit orders will not be published if placed over the web. There will be no facility to submit an order via the online service and get the order published.

Customers who then place limit orders via the telephone will receive a message similar to that on the web. Customers will be informed of the restrictions on publication, i.e. only in order driven stocks, T+3, within Normal Market Size (NMS), Good For Today Only and subject to Multi Fills. If the customer’s order does not comply with the restrictions then in proceeding with their order they are once again expressly instructing us to not publish their order. However, should the customer’s order be consistent with the restrictions and they wish to have their order published, this will be manually placed directly onto the Order Book.

Scripting has been provided so that customer service representatives provide a consistent response when faced with enquiries from customers.

NWS is required to monitor the effectiveness of its order execution arrangements and execution policy to identify and correct any deficiencies.  It must assess on a regular basis whether the execution venues included in the execution policy provide for the best possible result. 

NWS will undertake an annual review of the execution policy and order execution arrangements, and when a material change occurs that affects NWS’s ability to continue to obtain the best possible result for the execution of its customer orders on a consistent basis using the venues included in its execution policy. Any material changes to the order execution arrangements or Execution Policy, made by the FSA, or ourselves, will be subject to change control and formal internal approval. NWS must notify customers of material changes to the order execution arrangements or Execution Policy.

NWS must be able to demonstrate to its customers, that it has executed their orders in accordance with the execution policy, at their request.

NWS maintains an audit trail for all telephone and electronic orders executed Furthermore, all trades dealt via Agency Centre or Proquote can be identified using the Proquote Best Execution Application. This system will compliment the telephone and electronic records retained to assist us in ascertaining whether the best possible result has been achieved.

Regular monitoring by both NWS Customer Services and the Compliance function will assess the quality of execution benchmarked against the NWS Execution Policy.

Both business areas will use a combination of electronic and telephone records and the Proquote Best Execution Application for their monitoring. The sampling and frequency of the monitoring undertaken will be detailed in the respective departmental procedures.

NWS has the flexibility to accommodate a number of different customer requirements when handling their dealing instructions. A standard instruction, as defined by NWS, would be an execution only instruction to deal ‘at best’ in the market on a T+3 settlement. Anything beyond this would be classified as specific instructions. NWS is required to execute the order following the specific instruction.

Acting on a specific instruction may prevent NWS from taking steps to obtain the best possible result for the execution of a customer order in respect of the elements covered by the specific instruction.  NWS will be treated as having satisfied the best execution obligation in respect of the part or aspect of the order to which the specific instructions relate. However, where any specific instructions cover only one part or aspect of the order, this will not be treated as releasing NWS from the best execution obligations in respect of any other part or aspect of the order that are not covered by such instructions.

Where a system failure occurs, NWS will endeavour to meet the Execution Obligation.

The execution venues and third parties that NWS use for executing and receiving and transmitting orders are listed below. This list is not exhaustive but it comprises those execution venues and third parties on which we place significant reliance. We reserve the right to use another execution venue and third parties where we consider that it is appropriate in the light of our Execution Policy and we may from time to time add or remove an execution venue or third party from this list. We will regularly assess the execution venues and third parties available in respect of any products that we trade to identify those that will enable us, on a consistent basis, to obtain the best possible result when executing orders

For further details on the RSPs polled when executing orders consult the trade diagrams in Appendix C.

It has been mentioned previously in this execution policy that NWS both Executes Orders and Receives and Transmits Orders. There is a subtle difference between the two.

When Executing Orders, NWS would be in direct contact with the counterparty with which the trade is being executed, e.g. NWS would be trading directly with Winterflood Securities. This situation would occur if NWS’s orders are executed via the Agency Centre, via the Proquote Dealserver (see the details below and the trade diagrams in Appendix C for more details), or manually traded by telephone. This is the case for all of NWS’s UK trades and some non-UK trades.

NWS would only be Receiving and Transmitting Orders when there is an intermediary participating in the process to ensure that the trade is executed. An example of this type of transaction is when an international order is sent to ABN Amro, TD Canada, or ISM acting as intermediaries. The order is sent to the intermediary for them to execute the order. When the intermediary places the order onto another country’s exchange then this order has been received and transmitted. An example of an order being executed is where the intermediaries take the order onto their own book. In this example, NWS has dealt directly with the counterparty.

Consult Appendix C for details of the trade flow diagrams.

The order will route to the Agency Centre Dealserver, which will initially poll a number of RSPs and trade at the best price with regard to price and size of the order.

An order that cannot be dealt as above will route through the Agency Centre Dealserver to the Proquote Dealserver, where there is a larger group of RSPs that will trade at the best price with regard to the size of the order.

An order that cannot be traded electronically, will be passed to a registered market dealer. The registered market dealer will approach the relevant market maker to trade if the order is within size. If over quote size the dealer will ring at least two market makers to obtain best price.

NB: A Protrader’s order will route through the Agency Centre Dealserver but will be presented to all RSPs available through the Proquote Dealserver.

1. The order routes through the Agency Centre Dealserver, which links into Bondscape, which in turn polls three RSPs and TD Securities. The trade is executed at the best price with regard to price and size of the order. 
2. An order that cannot be traded electronically, will be passed to a registered market dealer. The registered market dealer will approach at least two market makers to obtain best price.

The order is routed to the price monitoring system (Erik). If the order is tradeable (market price versus specified order price), the order will route through the Agency Centre Dealserver, which will initially poll a number of RSPs and trade at the best price with regard to price and size of the order.

An order that cannot be dealt as above will route through the Agency Centre Dealserver to the Proquote Dealserver, where there is a larger group of RSPs that will trade at the best price with regard to the size of the order.

If the order is not immediately tradeable it will still be routed to the price monitoring system (Erik). Erik will monitor the order until it is tradeable.

An order than cannot be traded electronically, will route to a registered market dealer. The registered market dealer will approach the relevant market maker to trade if the order is within size. If over quote size the dealer will ring a least two market makers to obtain best price.

The market dealer will approach markets makers based on previous relationships and market form.

European orders are routed through an ABN dealserver which send orders direct to ABN Amro, who deal directly on the underlying market. If any trades cannot be sent through the ABN dealserver, orders are rung direct through to ABN.

American orders are routed through the ISM dealserver that monitors limits, stop losses, and executes market orders on the relevant market. If any trades cannot be sent through the ISM dealserver, orders are rung direct through to the execution desk in TD Waterhouse Canada.

Asia and Pacific orders are routed through an ABN dealserver which send orders direct to ABN Amro, who deal directly on the underlying market. If any trades cannot be sent through the ABN dealserver, orders are rung direct through to ABN, or sent on a blotter should the order be received outside normal market hours.

NWS introduces all such business to the CMC Group. CMC transacts all trades under a white label agreement under the trading name NatWest Index/RBS Spread Trading.

Trade Diagrams

Reception and transmission of orders in relation to one or more financial instruments.
Execution of orders on behalf of clients.
Dealing on own account.
Portfolio management.
Investment advice.
Underwriting of financial instruments and/or placing of financial instruments on a firm commitment basis.
Placing of financial instruments without a firm commitment basis
Operation of Multilateral Trading Facilities

Safekeeping and administration of financial instruments for the account of clients, including custodianship and related services such as cash/collateral management;
Granting credits or loans to an investor to allow him to carry out a transaction in one or more financial instruments, where the firm granting the credit or loan is involved in the transaction;
Advice to undertakings on capital structure, industrial strategy and related matters and advice and services relating to mergers and the purchase of undertakings;
Foreign exchange services where these are connected to the provision of investment services;
Investment research and financial analysis or other forms of general recommendation relating to transactions in financial instruments;
Services related to underwriting.
Investment services and activities as well as ancillary services of the type included in this section or above which are related to the underlying of the derivatives included in the last 4 categories of financial instruments listed in Appendix E and it is connected to the provision of investment or ancillary services.

Transferable securities;
Money-market instruments;
Units in collective investment undertakings;
Options, futures, swaps, forward rate agreements and any other derivative contracts relating to securities, currencies, interest rates or yields, or other derivatives instruments, financial indices or financial measures which may be settled physically or in cash;
Options, futures, swaps, forward rate agreements and any other derivative contracts relating to commodities that must be settled in cash or may be settled in cash at the option of one of the parties (otherwise than by reason of a default or other termination event);
Options, futures, swaps, and any other derivative contract relating to commodities that can be physically settled provided that they are traded on a regulated market and/or an MTF;
Options, futures, swaps, forwards and any other derivative contracts relating to commodities, that can be physically settled not otherwise mentioned in C.6 and not being for commercial purposes, which have the characteristics of other derivative financial instruments, having regard to whether, inter alia, they are cleared and settled through recognised clearing houses or are subject to regular margin calls;
Derivative instruments for the transfer of credit risk;
Financial contracts for difference.
Options, futures, swaps, forward rate agreements and any other derivative contracts relating to climatic variables, freight rates, emission allowances or inflation rates or other official economic statistics that must be settled in cash or may be settled in cash at the option of one of the parties (otherwise than by reason of a default or other termination event), as well as any other derivative contracts relating to assets, rights, obligations, indices and measures not otherwise mentioned in this Section, which have the characteristics of other derivative financial instruments, having regard to whether, inter alia, they are traded on a regulated market or an MTF, are cleared and settled through recognised clearing houses or are subject to regular margin calls.