1. Best execution: state of play for investment managers in the EU ‘WFE Workshop on Market Structure and Statistics’, World Federation of Exchanges, Paris, 2 nd December 2008 Stéphane JANIN Director, Head of International Affairs Division

2. 2 Overview 1.Best execution in MiFID 2.Remaining major questions on best execution for investment managers 3.Perspectives

3. 3 1. Best execution in MiFID (1/2) 1.Markets in Financial Instruments Directive (MiFID): -End of ‘concentration rule’=> requirement of ‘best execution’ 2. But the definition of ‘best execution’ is wide – and vague: -Art. 21 Directive 2004/39/EC: « Obligation to execute orders on terms most favourable to the client: (…) investment firms [must :] - take all reasonable steps - to obtain the best possible result for their clients - taking into account price, costs, speed, likelihood of execution and settlement, size, nature or any other consideration relevant to the execution of the order

4. 4 1. Best execution in MiFID (2/2) 3.Best execution parameters to be taken into account (Art. 44 Dir. 2006/73/EC): - categorisation of the client (retail vs. non-retail) - characteristics of the clients order and relevant financial instruments - characteristics of the execution venue - in case of retail clients: only price and costs related to execution 4.Best execution is also required from investment managers when providing for portfolio management or reception/transmission of orders (Art. 45 Dir. 2006/73/EC): even if softened: to act in the best interests of clients

5. 5 2. Remaining major questions on MiFID best execution for investment managers (1/3) 1. Investment managers are both clients and providers 2. As clients (for the service of execution of orders), they don’t benefit from best execution as such (except if they ask for getting a retail status) 3. As providers (for the services of portfolio management or transmission of orders) they have to comply with a (softened) version of best execution vis-à- vis their own retail clients 4. As providers (for the service of collective management) they are not covered by MiFID

6. 6 2. Remaining major questions on MiFID best execution for investment managers (2/3) 5. The issue for best execution regarding some financial instruments traded on OTC markets: - some instruments are structurally traded on OTC markets (e.g. bonds) - where the market is organised by market-makers - and while no trade transparency is required for non-equities - therefore the level of information for investment managers is lowered as compared to the one of market-makers with which they trade => which requirement for investment managers: how to ensure best execution when there is no required trade transparency - which level of responsibility for investment managers??

7. 7 2. Remaining major questions on MiFID best execution for investment managers (3/3) 6. Which organisation for management companies: -The best execution requirements were not clear: -For non-equity instruments traded on OTC markets -For managers as compared to brokers -But investment managers (among others) had to implement such requirements in their own organisations by 1st November 2007 -=> Different approaches followed by management companies all over the EU: -Some (big) ones set up dedicated internal execution platforms -Many decided to invest in external information systems -But uncertainties were not solved…

8. 8 3. Perspectives 1.Best execution for management companies as clients (exec. of orders): Will mainly depend on the power relationship between the management company and its broker – still uncertainties on OTC markets (bonds) vis-à-vis market- makers 2.Best execution for management companies vis-à-vis their own clients(portfolio management + transmission of orders): obligation of means (i.e. best selection of brokers) rather than obligation of results (as usually no direct access to markets) 3.But remaining uncertainties would require reviewing the MiFID as soon as possible (e.g. meaning of best execution when no trade transparency?)

9. 9 Thanks! Stéphane Janin Association Française de la Gestion financière (AFG – French Investment Fund and Asset Management Association), 31 rue de Miromesnil, 75008 Paris, s.janin@afg.asso.fr, +33 1 44 94 94 04