As part of effort to protect investors
The board of the International Organization of Securities Commissions (IOSCO) on Monday, June 19 published its Final Report on Order Routing Incentives, that provides an overview of the practices used by market regulators regarding incentives for order routing that may influence how intermediaries treat their clients.
IOSCO is the leading international policy forum for securities regulators and is recognised as the global standard setter for securities regulation.
The organisation’s membership regulates more than 95 per cent of the world’s securities markets in more than 115 jurisdictions and it continues to expand.
The report examines the regulatory conduct requirements for brokers or firms to manage conflicts of interest associated with routing orders and obtaining best execution.
It assesses how these requirements interact with market practices in different jurisdictions to shape order routing incentives and how these incentives influence the behaviour of intermediaries towards their clients. Such incentives may include, for example, discounts or rebates designed to direct order flow to one particular venue or to channel payments from one intermediary to another to receive their order flow.
IOSCO´s work on order routing incentives forms part of its ongoing effort to protect investors, promote market liquidity and efficiency, and enhance price transparency in financial markets.
To prepare the report, IOSCO conducted a survey of members on current and/or publicly proposed regulatory initiatives involving incentives that may influence the behaviour of market intermediaries in different jurisdictions.
In December 2016, it issued the Report on Order Routing Incentives for public consultation. None of the four comment letters it received proposed substantive changes to the report.
Among various monetary and non-monetary order routing incentives, the report focuses on the following three primary types of incentive arrangements or commercial practices: Monetary incentives paid or received by brokers to or from third parties; Internalization and use of affiliated venues that may reap commercial benefits for a broker; and Provision of goods and services bundled with execution by brokers, such as research.
All respondents to the consultation welcomed the report and stressed the importance of the conduct issues in connection with order routing incentives.
Most agreed with IOSCO´s conclusion that no further work was required at this stage, arguing that existing regulation or imminent reforms (e.g., in the EU under MiFID II) adequately address conduct risks linked to order routing incentives.
The IOSCO Board is the governing and standard-setting body of the International Organization of Securities Commissions (IOSCO), and is made up of 34 securities regulators. Ashley Alder, the Chief Executive Officer of the Securities and Futures Commission (SFC) of Hong Kong, is the Chair of the IOSCO Board.
The members of the IOSCO Board are the securities regulatory authorities of Argentina, Australia, Belgium, Brazil, China, Egypt, France, Germany, Hong Kong, India, Indonesia, Ireland, Italy, Jamaica, Japan, Kenya, Malaysia, Mexico, Nigeria, Ontario, Pakistan, Peru, Quebec, Saudi Arabia, Singapore, South Korea, Spain, Sweden, Switzerland, the Netherlands, Turkey, the United Kingdom, and the United States of America.