In the fast-paced world of global finance, where literally every second counts and market volatility is accepted as the norm, ensuring clients get the best execution is more than a priority; it’s a regulatory necessity. Relatively simple in theory, in practice, best execution regulation has evolved into a complex global challenge, with expanding markets, technological advancements, and ever-evolving regulations in Europe, the US, and further afield.
Regtech companies now face a challenging balancing act: delivering compliance across diverse jurisdictions while managing obstacles from data integration to cross-border market dynamics. This article considers the critical role of best execution compliance, the challenges faced by firms trying to navigate it, and the innovative solutions emerging from the Regtech sector, paving the way forward.
The global regulatory landscape and best execution compliance
To address best execution compliance requirements across numerous markets and jurisdictions, it’s important to appreciate the diverse nature of current regulations and the impact on and challenges faced by the Regtech sector.
Diverse regulatory standards
When it comes to best execution, the global regulatory landscape is still somewhat varied, though growing more standardised with each passing year. As financial markets have grown increasingly globalised, there has been a clear move towards international harmonisation of regulatory standards. Best execution is just one such area that has been impacted by this trend.
Generally speaking, regulatory stances shift towards the dominant regulations from major market players, such as MiFID in the EU, and the SEC’s rules in the US. While other countries and regions will fight to maintain a degree of independence when it comes to regulations, they will need to adhere to the more dominant regulations to encourage confidence amongst global institutions and investors.
For the time being, however, the fact of the matter is that there exists a degree of variability across regulatory jurisdictions. As such, the main challenge for both financial institutions and Regtech providers is aligning local variations and formats across multiple jurisdictions.
Impact on Regtech
Outsourcing the monitoring of regulatory responsibilities is now commonplace across the financial services industry. There are two primary reasons for this:
- Cost savings: Maintaining in-house teams focused on different market regulations is costly and time-consuming.
- Technological advances: Cutting-edge Regtech innovations have significantly reduced time requirements by enabling the use of diverse data types.
This enables financial institutions to focus on core strengths—client interactions, investment strategies, and growth—while knowing that advanced Regtech systems handle best execution compliance, a benefit well-regarded by regulators.
In this section, we will explain how these diverse standards impact the development and implementation of Regtech solutions.
Data management and integration challenges
Data management is a very complex area in the Regtech market. It involves ingesting and analysing both structured and unstructured data to monitor ongoing best execution compliance while flagging any potential infringements or shortcomings. Aside from the challenges of converting different data types into more useful formats, there’s also the issue of integrating data from multiple systems into a single compliance platform.
Data collection and quality
When integrating data from diverse global sources, the focus is on quality and accuracy. Among other factors, this can be impacted by different formats and field variance across jurisdictions. As mentioned above, global regulators are working more closely together than ever before to align the type, depth, and format of data made available for compliance issues, but data harmonisation remains a challenge.
In an attempt to more closely integrate into the global investment market, many of the peripheral markets and associated regulators are now aligning their operations with leading counterparts. This introduces a critical element of trust and could be the difference between financial institutions operating in different jurisdictions. As global standards emerge regarding data collection quality, this makes it easier to tweak and make changes in the future.
Data integration
Collecting different forms of data than reformatting while maintaining accuracy is a challenge in itself. Beyond that, an additional challenge is found in the integration of data from different systems, different markets, and pertaining to different asset classes.
Recent example
Monitoring best execution in one particular market in isolation is dangerous, as we saw with the US subprime mortgage crash in 2007. At the height of the housing boom, mortgages were approved where the client had little chance of ever fulfilling their financial obligations. The leading financial institutions quickly sliced and diced these arrangements, creating income and capital-focus bonds that often failed to reflect the underlying risks.
The complexity of these arrangements and the challenges in connecting them back to the original mortgages meant it was near impossible to accurately reflect the growing risk. When the housing market cooled, the default rate on subprime mortgages increased, leading to the collapse of what had become a huge mortgage-backed bond sector.
Lack of interconnectivity
If financial institutions and regulators had been able to connect systems, markets, and different asset classes, creating a complete virtual paper trail, warning signs would have emerged much sooner. This brings us to the issue of streamlining data integration and ensuring consistency so that Regtech companies, financial institutions, and regulators can join the dots.
Technological infrastructure and real-time monitoring
Enhancements in technological infrastructure are critical when it comes to best execution regulations and the wider regulatory framework. There is also the holy grail of real-time monitoring, which is, for many, the ultimate goal, but is it really achievable?
Technological demands
As with any investment transaction, it’s essential to address the risks and potential rewards of ongoing investment in technological infrastructure. We know that using advanced analytics, AI, and machine learning undoubtedly improves monitoring capabilities, but what’s the ultimate aim? In the world of business, there is an inevitable trade-off between investment and return, and it is no different for technology. Does the industry need to invest a few hundred million dollars to capture the outstanding 0.001% of questionable transactions?
In many ways, real-time monitoring is a fallacy because as soon as the data is received, many would argue systems are taking a reactive rather than proactive approach. This is at odds with the definition of real-time monitoring, but in reality, it is as close as we will get. Looking further down the line, the emergence of potential red flags will require the human touch at some point to decide whether further investigation is required.
Scalability and costs
As a financial institution looking at Regtech compliance systems, scalability is one of the major attractions. This allows many financial institutions to grow with the confidence that cost-effective scalability of existing compliance systems is achievable. However, it is important to appreciate that widespread scalability can place pressure on the availability of skilled personnel and storage and processing capacity.
We can’t simply continue scaling high-tech systems without appreciating, albeit expanding, broader capacity. There is also the ESG angle, with many investors, financial institutions, regulators, and governments more acutely aware of their wider responsibilities. To suggest that we can scale and expand technological capacity going forward is certainly naïve and potentially dangerous if not conducted in a controlled manner.
Cross-border compliance and market dynamics
The key to cross-border compliance, considering different market dynamics, is broad alignment across markets, financial institutions, and regulators. In many ways, you could argue that all parties are being forced to work together to accommodate an expanding global financial market.
Cross-border challenges
There are numerous examples of cross-border challenges, but one topical issue is cryptocurrency. Amid an ever-tightening regulatory burden in Europe, the UK, and the US, regulators in Hong Kong have taken a more accommodating and investor-friendly approach. Many would argue this has placed the region as the global cryptocurrency hub, which brings about its own global regulatory challenges.
This market is relatively early in its regulatory journey within an emerging but not yet finished structure. So, not only are there best execution compliance issues to address in local markets, but in many ways, this perfectly reflects cross-border/global challenges amidst the need to build trust and confidence.
On a more basic level, there are other issues to consider, such as:
- Varying market structures
- Trading hours
- Liquidity
For example, liquidity is one issue often overlooked when it comes to best execution compliance. Without a reasonable level of liquidity, you may be dealing on the best screen/market price, but can you guarantee to a client that this is a fair valuation?
Market dynamics
As a basic point, it’s helpful to look back and see how far compliance and, more lately, Regtech companies have come in recent years. We can only imagine the challenges faced by more manual-focused compliance processes on a local and global scale, taking in issues such as:
- Market volatility
- Geopolitical changes
- Emerging markets
These are still significant issues today for technology development, and more cooperation between global regulators has, to a certain extent, enhanced the ways they are monitored. We are not suggesting that these issues are more controllable in the current environment; they are just situations that are more transparent.
Strategic solutions
While the introduction of AI and machine learning has significantly improved the delivery of compliance monitoring technology, it doesn’t really change the fundamentals. While this article is focused on best execution regulations, the concept of strategic solutions is broader.
Working closely with financial institutions and market operators, Regtech companies constantly collaborate with global regulators while monitoring market conditions. Taking a step back, it’s important to separate the theory of global regulation from the practice of using cutting-edge technology to enhance transparency and compliance.
Ultimately, unless all of the global entities involved in financial markets, transactions, and regulation work together, singing perhaps not from the same hymn sheet but from a similar hymn sheet, the potential of technological advances will not be fulfilled.
eflow’s advanced execution monitoring solutions
Compliance demands extend beyond simple trade reporting in today’s rapidly evolving regulatory environment. Financial institutions require dynamic tools to ensure best execution while maintaining data accuracy, transparency, and auditability across global jurisdictions. eflow offers a comprehensive suite of execution monitoring services designed to address these challenges efficiently and effectively.
Best execution monitoring
eflow’s platform uses analytics and machine learning to track execution quality instantly, identifying issues like price slippage and delays as they happen.
Customisable compliance
Firms can set region-specific parameters (e.g., MiFID II, FINRA) to align with local regulations while maintaining global best execution standards.
Automated audit trails
eflow provides detailed transaction records and customisable reports, simplifying internal audits and regulatory reviews.
Easy system integration
eflow’s platform integrates with legacy systems, minimising disruptions and reducing compliance upgrade costs.
Why choose eflow?
By combining advanced analytics with monitoring, customisable parameters, and robust reporting capabilities, eflow provides financial institutions with a sophisticated, reliable compliance solution that can adapt to the ever-changing landscape of global regulations. With eflow’s tools, firms can confidently ensure best execution compliance, reduce operational risks, and maintain trust with clients and regulators alike.
Conclusion
When looking at best execution compliance globally, it is important to appreciate how this contributes to trust in individual markets and the emerging global market. Similarly to the contagion we saw during the corporate financial crisis, an emerging mistrust in one market can quickly be replicated in others. This gradual reduction in trust can cause significant market volatility and, as we have seen in recent times, potentially expensive intervention by central banks, governments and regulators to reinstate trust and markets.
Regulators worldwide are working together to create a more structured approach to global investment regulations and compliance. While this is an ongoing process, many believe that the future challenges lie in connecting activity in different markets, such as equity markets, derivatives, and futures (and their numerous variations).
As a financial institution, it is important that you continue to invest in advanced technologies, especially with increased regulatory compliance obligations. At eflow, we provide the latest in transaction monitoring and best execution analysis services. Using cutting-edge technology, we are able to monitor and analyse data extremely quickly, creating the appropriate red flags for further investigation.
