MiFID: Best Execution and Market Transparency Information for Investment Firms

Transcription

1 MiFID: Best Execution and Market Transparency Information for Investment Firms Deutsche Börse Group services Updated version June 2007

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3 MiFID: Best Execution and Market Transparency 3 Level Playing Field in the European Economic Area The EU Markets in Financial Instruments Directive (MiFID) is the new constitution for the European financial market, and the centerpiece of the European Commission s Financial Services Action Plan (FSAP). The MiFID sets out uniform regulations for the provision of investment services within the European Economic Area (EEA) and aims to create a common competitive environment for investment firms and stock exchanges. The MiFID is also designed to improve investor protection, as well as the effi ciency and integrity of the European fi nancial market: in addition to new organizational requirements, it sets out a new code of conduct and new requirements with respect to market transparency. These include, among others, best execution, i.e. order execution on the terms that are most favourable to the client, and trading transparency two of the key points of the Directive. This brochure provides you with an overview of the MiFID requirements for best execution, trading transparency and reporting requirements in accordance with section 9 of the German Securities Trading Act (WpHG). The Deutsche Börse Group services presented in this document offer you competent support in setting out and implementing your execution policy. Rainer Riess, Managing Director Stock Market Business Development Member of the Management Board of the Frankfurt Stock Exchange Holger Wohlenberg, Managing Director Market Data & Analytics The creation of an execution policy presents both challenges and business opportunities to the affected companies, with careful order execution and the provision of comprehensive pre and post-trade information going hand in hand. These are convincing quality criteria in competition to win clients and allow investment firms to put themselves at an advantage vis-à-vis competitors that follow a minimalist approach when it comes to meeting regulatory requirements.

4 4 MiFID: Best Execution and Market Transparency MiFID Requirements for Best Execution and Transparency An overview of the MiFID requirements and services provided by Deutsche Börse Group Deutsche Börse Group provides you, as an investment fi rm, with active support in meeting the numerous requirements set out in the MiFID. The following table gives you an overview of the new MiFID requirements and the Deutsche Börse Group services that guarantee you the best possible support in meeting the new requirements with respect to best execution, transparency and reporting requirements. Fig. 1: Meet the MiFID requirements with the help of Deutsche Börse Group services MiFID requirement Deutsche Börse service Best Execution Execution quality Best execution of client orders for more than 200,000 securities traded on the Frankfurt Stock Exchange on Xetra or on the trading floor Reporting /disclosure requirement Vis-à-vis clients: immediate information on details of executed transactions via performance reports, i.e. provision of reports on the price and execution quality of the Frankfurt Stock Exchange Post-trade transparency Establishment of post trade transparency for transactions executed on an off-exchange basis in shares and certificates representing shares that are admitted to trading on a regulated market within the EEA Company classification support Classification and verification of data on business partners via subsidiary Avox Transaction reporting Reporting of transactions to the respective responsible supervisory authorities in accordance with section 9 WpHG (MiFID Article 25)

5 MiFID: Best Execution and Market Transparency 5 MiFID best execution requirements Recital 33 of the MiFID reads as follows: It is necessary to impose an effective best execution obligation to ensure that investment fi rms execute client orders on terms that are most favorable to the client. As a result, the Directive provides regulations on the best execution of client orders covering a range of different aspects. Investment fi rms must introduce processes and procedures to ensure best execution. They are also required to set up systems that they can use to provide their clients with the appropriate information. All of these measures must be summarized in an execution policy. The regulations on best execution always come into play when clients include no specifi c instructions in their orders. But even those investment firms that only receive orders containing instructions have to draw up an execution policy. These principles on order execution must be drawn up for all financial instruments. The following aspects must be taken into consideration in accordance with Article 21 (1) of the MiFID: Price Costs Speed Likelihood of execution Likelihood of settlement Size Nature of the order Any other relevant considerations In accordance with Article 44 (1) of the MiFID implementing directive, these aspects must be weighted in accordance with their relative importance, whereby the following criteria must be taken into account: The characteristics of the client including the categorization of the client as retail or professional The characteristics of the client order (e.g. limited /unlimited) The characteristics of fi nancial instruments to which the order relates The characteristics of the execution venues to which that order can be directed Investment firms must also observe the following provisions with respect to the choice of trading venue, order execution and the monitoring and recording of a fi rm s own services and procedures relating to best execution as set out in the MiFID/MiFID implementing directive: When selecting suitable execution venues, an investment fi rm should choose those venues that enable it to obtain on a consistent basis the best possible result for the execution of client orders (recital 66 of the MiFID implementing directive). Investment fi rms must inform their clients of the execution venues on which their orders will be executed. At the very least, they must specify the possible venues included in the respective execution policy (Article 21 (3) MiFID). The investment fi rms must provide reasons to support their choice at the same time. Investment firms must inform their clients of their order execution policy and are required to obtain the prior consent of their clients with respect to this policy (Article 21 (3) MiFID). They must demonstrate to their clients, at the request of the latter, that they have executed their orders in accordance with their execution policy (Article 21 (5) MiFID). The investment fi rms must also notify clients of any material changes to their order execution arrangements or execution policy (Article 21 (4) MiFID).

6 6 MiFID: Best Execution and Market Transparency When dealing with orders from retail clients, the best possible result is that which offers the lowest possible total consideration, calculated by adding the price of the fi nancial instrument to the costs related to order execution including the investment firm s own commissions or fees (recitals 67 and 71 and Article 44 (3) of the MiFID implementing directive). Investment fi rms can only execute client orders outside of a regulated market or a multilateral trading facility (MTF) with the express consent of the client (Article 21 (3) MiFID). Investment fi rms must review the effi ciency of their order execution arrangements and execution policy on a regular basis. In particular, they are required to review on a regular basis (at least once a year, see Article 46 of the directive implementing the MiFID), whether or not the venues included in this policy still provide the best possible result for their clients (Article 21 (4) MiFID). Differences in the commissions or margins that the investment fi rm invoices to the client for order execution must refl ect the differences in the costs actually incurred by the investment fi rm at various venues. Otherwise, the investment fi rm is deemed to be discriminating unfairly (recital 73 of the directive implementing the MiFID). Investment fi rms must keep records of their services and transactions that are sufficient to enable the authorities to monitor compliance with the requirements set out in the MiFID (Article 13 (6) MiFID in conjunction with Articles 7 and 8 of the Regulation implementing the MiFID). MiFID requirements on pre and post-trade transparency In addition to the best execution requirements, the new uniform regulations governing pre and post-trade transparency are another key feature of the MiFID. The transparency regulations are aimed firstly at regulated markets and MTFs, but also at investment fi rms insofar as they trade in shares or certifi cates representing shares that are admitted to trading on a regulated market within the EEA outside of a regulated market or an MTF. This means that investment firms, for example, that executed client orders on their own account outside of a regulated market or MTF in an organized and systematic manner and on a regular basis, are obliged to establish pre-trade transparency if they meet the criteria set out in Article 21 (1) of the Regulation. Nevertheless, this requirement relates solely to liquid equities as set out in Article 22 of the Regulation. Systematic internalizers are obliged to publish market-oriented prices and to keep a record of these prices for one year for each liquid share which they trade (see Article 24 of the Ordinance). Article 25 of the Regulation provides details of the execution of orders by systematic internalizers. The implementation of the MiFID means that investment fi rms must make public any purchases and sales of equities executed during their usual trading hours to other market participants (see Article 27 of the Regulation). Among other things, MiFID sets out the requirement to publish quality-assured trading data within a maximum of three minutes of the transaction time. Each transaction must be made transparent separately and only once. A delay of large transactions traded for a client against a company s own book may be authorized at national level (see Article 28 of the Regulation).

7 MiFID: Best Execution and Market Transparency 7 The extent to which publication can be delayed depends on the size of the transaction and the liquidity of the traded instrument and can, in principle, be requested for a period of up to three trading days after the conclusion of the trade (Annex II, Table 4 of the Regulation). The data published must contain, among other things, the date and time of the trade, the price, the trading volume of the transactions executed and the trading venue identifi cation code. The abbreviation OTC (or SI in the case of systematic internalizers of this instrument) can be used as the trading venue ID as opposed to a unique ID. A full overview of the data fi elds to be published can be found in Article 27 (1) and (2) of the Regulation in conjunction with Table 1 of Annex I of the Regulation. You can fi nd a concise overview of the services provided by Deutsche Börse AG with respect to post-trade transparency on pages 18 and 19 of this brochure, as well as in the Deutsche Börse Group brochure entitled MiFID Moving towards an integrated European fi nancial market. Under the MiFID, the supervisory authority to which banks have to report to is generally determined on the basis of the home country principle. Eurex and Xetra EU remote members, for example, will report to the supervisory authorities in their home country, as opposed to BaFin, as at present. Exceptions apply to permanent establishments, in which case MiFID states that the host state will receive the reports in the future. Deutsche Börse AG is currently examining whether or not it can use its TRICE reporting system to support British and French Eurex and Xetra EU remote members, too, in meeting their reporting requirements with respect to transactions executed on Eurex and Xetra vis-à-vis the respective responsible supervisory authorities (Financial Services Authority (FSA)/Autorité des Marchés Financiers (AMF)). You can fi nd the latest developments at > Market Data & Analytics > Reporting System > TRICE. Reporting under the MiFID In accordance with section 9 WpHG, investment fi rms already have to report securities and derivatives transactions to the responsible supervisory authority. These reports will also have to be made in accordance with the MiFID. With TRICE, Deutsche Börse Market Data & Analytics already offers trading participants a convenient solution for the transmission of data regarding transactions that are subject to reporting requirements to the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht BaFin). Deutsche Börse will implement the regulatory requirements in the TRICE reporting system in good time, whereby this service will meet the guidelines prescribed by BaFin.

8 8 MiFID: Best Execution and Market Transparency Best Execution and Transparency on the Frankfurt Stock Exchange The selection of the best trading venue is a key to the MiFID best execution requirements and is one of the main responsibilities of investment fi rms. The best trading venues can be described, in the main, as those that offer high liquidity, transparent trading and fi rst-class quality with respect to quotation and order execution for all securities. The Frankfurt Stock Exchange, with the fully electronic Xetra trading platform and intermediary-based trading on the trading fl oor, is Germany s leading marketplace provider. The market models of the Frankfurt Stock Exchange: an ideal context for best execution The Frankfurt Stock exchange offers market participants two successful market models, fl oor trading and Xetra trading, which boast market shares of 70 percent and 96 percent respectively (measured in terms of the order book turnover in equities of all German stock exchanges) and, as a result, are by far the most liquid trading venues in Germany an ideal environment for investment fi rms looking to meet the best execution requirements set out in the MiFID. Fig. 2: Floor and Xetra trading efficiency and transparency on the Frankfurt Stock Exchange Market model Xetra Trading floor of the Frankfurt Stock Exchange Characteristics Electronic trading between 9 a.m. and 5.30 p.m. Automatic price determination based on price-time priority Trading form: auction and continuous trading Designated sponsors provide liquidity Fee only for orders fully executed on the same day, no fee for partial executions, no commission Germany s most liquid trading venue with a market share of percent 1) Floor trading from 9 a.m. to 8 p.m. Price determination by lead broker; principle of maximizing executions Trading form: ongoing auctions Neutral intermediary who balances the market and provides liquidity No partial execution (98.45 percent) 1) Germany s most liquid trading fl oor with a market share of 70 percent 1) Xetra BEST Guaranteed full execution Price improvement as against the current Xetra order book Attractive transaction costs Instruments traded Liquid shares, ETFs All shares, bonds, structured products, ETFs and funds 1) Source: Deutsche Börse AG, April 2007

9 MiFID: Best Execution and Market Transparency 9 Bundling liquidity on the Frankfurt Stock Exchange: market leader for prices, low costs and speed Deutsche Börse s Xetra liquidity measure (XLM) provides a system for measuring liquidity in electronic trading on the basis of implicit transaction costs. The XLM records the liquidity in the open Xetra limit order book in terms of the market impact costs, i.e. the costs of direct liquidity demand. The XLM has been calculated throughout the entire trading day for all equities contained in the German indices and in the EuroStoxx since July The lower the XLM, the higher the liquidity of the share and the guaranteed order execution. Xetra s XLM regularly comes out on top in international studies examining the implicit trading costs for highly liquid stocks. In floor trading, tradable quotes, i.e. bid and ask sides specifying the volume, increase the likelihood of execution from 9 a.m. until 8 p.m. The binding nature of quotes and, as a result, the execution quality offered are measured as part of the lead broker performance analysis. Active triggering of stop orders in accordance with a procedure that is approved and monitored by the Trading Supervisory Office (Handelsüberwachungsstelle) also increases the likelihood that orders will be executed. In the quality segment Smart Trading for structured products, issuers are obliged to provide bid and ask prices for their products on an ongoing basis, thus guaranteeing permanent liquidity. Cooperation and the technical infrastructure between issuers, lead brokers and the stock exchange play a key role in determining the execution quality in structured product trading. The close cooperation with market participants and the high demands placed on the technical infrastructure mean that Börse Frankfurt Smart Trading AG can offer the highest possible level of execution security and quality on the Frankfurt Stock Exchange. The establishment of rankings and the ongoing monitoring of these rankings mean that any problems in the processes can be identifi ed and resolved quickly.

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11 MiFID: Best Execution and Market Transparency 11 Criteria for an Execution Policy Deutsche Börse offers a whole range of services with respect to the criteria that apply to the best execution of client orders that will provide you, as an investment fi rm, with optimum support in preparing your best execution policy and reviewing this policy on a regular basis. These criteria, as well as the corresponding services offered by Deutsche Börse, are detailed below. Price implicit costs The pricing process applied by a trading venue has a considerable impact on price quality. As a general rule, the trading prices for a particular instrument are particularly close to the fair value of the instrument when as many trading participants as possible participate in the pricing process and bundle liquidity as a result. Our services On the Frankfurt Stock Exchange, prices are determined fully electronically in Xetra trading and by independent lead brokers in fl oor trading. The fully electronic Xetra market model hosts trading in liquid equities and ETFs in particular, between 9 a.m. and 5.30 p.m. Prices are determined automatically in order of price-time priority. Liquidity is provided by the designated sponsors, who are also subject to a performance analysis and receive a rating that measures the extent to which they comply with their obligations on a quarterly basis > Listing > Reports and Statistics > Designated Sponsors In Xetra trading, Deutsche Börse AG offers an additional integrated function: the Xetra BEST service. Xetra BEST offers participants an exchange-based and monitored means of executing orders on a bilateral basis on the regulated market. In addition to the advantages of order execution on Xetra extremely high execution speed, very low implicit and explicit transaction costs Xetra BEST also ensures price improvement and full order execution for investors: full execution against the BEST executor features an automatic price improvement as against the Xetra order book, ensuring best execution vis-à-vis the Xetra order book. Floor trading is subject to the principles of equal treatment and maximizing executions, i.e. each incoming order is treated in the same way between 9 a.m. and 8 p.m., irrespective of who placed it. The resulting minimized implicit costs benefi t investors by making it possible to execute orders within the specified spread. As a general rule, the Frankfurt lead brokers and specialists also contribute to liquidity: they enter into transactions themselves and add /withdraw securities to or from their portfolio in order to achieve the best price for the investor by way of a balanced order book. Lead brokers dealing with structured products use the issuer s reference price as a guide. They offer price improvements according to the order book situation. The section below provides details of the execution quality for the individual product groups: Equities At present, a total of almost 9,000 equities are traded at an extremely low cost on the Frankfurt Stock Exchange. In the fully electronic Xetra market model, 1,091 domestic and 7,728 foreign equities are tradable with no commission, while the number of domestic equities traded on the fl oor totals 1,093 and foreign equities 7,819. Xetra is the execution venue for liquid equities; orders are executed in a matter of milliseconds and at extremely low implicit costs between 9 a.m. and 5.30 p.m. As explained in the previous chapter, the general rule is that the higher the liquidity of the share, the higher the likelihood of execution.

12 12 MiFID: Best Execution and Market Transparency With an XLM of around 6 bp for DAX instruments, for example, which corresponds to 0.06 percent, Xetra is the leading execution venue for liquid equities and exchange-traded funds. The Frankfurt lead brokers provide a special service designed to avoid implicit costs for equities from the selection indices between 9 a.m. and 8 p.m. Investor orders for these securities are executed at the median of the bid-ask spread up to an agreed order volume ( zero spread ). As a rule, the prices quoted by the lead brokers for all liquid stocks in intermediary-based trading on the Frankfurt Stock Exchange reflect the prices on the reference or home market of the instrument in question. The performance analysis system described on the last few pages of this brochure guarantees compliance with the regulations. In trading with foreign stocks, the lead brokers on the Frankfurt Stock Exchange guarantee that these equities are traded in Frankfurt at the same conditions that apply to domestic stocks. The home or reference market principle, which is anchored in the rules and regulations of the Frankfurt Stock Exchange, minimizes the price differences between the respective home market and trading on the Frankfurt Stock Exchange. This means that the Frankfurt Stock Exchange is the reference market not only for all German stocks, but also for all of the international stocks traded in Germany. Certificates and warrants Today, investors can trade in over 180,000 structured products at a low cost on the Frankfurt trading fl oor. The majority of these products (95 percent) are listed in the quality segment Smart Trading. Smart Trading subjects issuers to the highest possible quality requirements. In particular, liquidity must be provided by the issuer for all smart trading products on a permanent basis between 9 a.m. and 8 p.m. The bid and ask prices are transmitted on an ongoing basis to the stock exchange infrastructure via at least two redundant leased lines and provided to investors in a range of different ways, including on the Internet, in real-time, and in a push procedure. The best price principle guarantees that orders are only executed at the current valid issuer quote or better. Furthermore, the quotes have to be valid for certain minimum volumes: in the case of investment products, this minimum size is 10,000. In practice, it is evident that far larger orders, too, can be executed at the current issuer price in most cases. Funds The best execution obligation also applies to client fund orders that are to be executed via a stock exchange. Within the framework of the national implementation of the MiFID in Germany, fund units traded in direct distribution have been exempted from the best execution principle. The XTF segment of the Frankfurt Stock Exchange in fully electronic Xetra trading is Europe s leading marketplace for exchange-traded funds (ETFs). With a current total of over 200 index funds, it offers a larger selection than any other European stock exchange. This means that the investment opportunities open to investors are equally varied from ETFs on wellknown European and US equity indices to index funds on exotic markets, other asset classes such as bonds and commodities, and a range of investment strategies. This growing offerings allows investors to structure their portfolios in an optimized manner from a risk-return point of view. The broad range of ETFs also has the advantage of being particularly cost-effi cient. The management fees are generally far lower than for actively managed funds, and investors are not charged any front-end load or redemption fee.

13 MiFID: Best Execution and Market Transparency 13 Exchange-traded funds are traded continuously on Xetra, thus allowing immediate execution at an established price that is based on the current index value. At least one designated sponsor undertakes to quote binding bid and ask prices in accordance with a maximum bid-ask spread. The numerous advantages with respect to structure and trading have made ETFs the most liquid product group on the Xetra electronic trading system since they were launched seven years ago. Investors can trade in traditional investment funds in intermediary-based trading from 9 a.m. until 8 p.m. on the Frankfurt Stock Exchange. Exchange trading of actively managed funds is now well established: investors can select from more than 3,100 tradable products, without a front-end load when purchased via the stock exchange. This reduces costs and maximizes returns. Fund trading also entails a number of guarantees with respect to minimum volumes and maximum spreads: The minimum volumes for estimates are as follows: Equity funds that invest solely or predominantly in German or western European equities, bond funds, money market funds, real estate funds, mixed funds and other funds: 100,000. Equity funds that invest predominantly in non- European or eastern European equities, or in particular sectors: 20,000. The maximum spread, in terms of the bid limit of the estimates, is as follows: Equity funds that invest solely or predominantly in German or western European equities: 1.5 percent. Bond funds: 1 percent. Money market funds: 0.5 percent. Equity funds that invest predominantly in non- European or eastern European equities, or in certain sectors, real estate funds, mixed and other funds: 2 percent. Bonds Roughly 14,000 bonds can currently be traded on the fl oor of the Frankfurt Stock Exchange, more than on any other European stock exchange. In addition to the large selection of securities on offer, investors benefi t from the particular quality standards maintained by the lead brokers in bond trading. Since 1 April 2007, the Frankfurt Stock Exchange has restructured its offering for tradable bonds and offers trading in two segments with particular requirements, including with respect to the maximum spread and the minimum quotation volume: the Select Bonds quality segment and the Prime Bonds premium segment. Select Bonds meet the following criteria: Maximum spread 30 cents, Maximum volume 100,000. The following requirements apply to bonds in the Prime Bonds premium segment: Maximum spread 5 cents, Maximum volume 250,000. Free real-time quotes are made available for both segments via the Frankfurt Stock Exchange website. The newly created quality segments replace the selfcommitments agreed with the responsible lead brokers back in 2005 with respect to particular quality requirements for German government securities and variably tradable Jumbo Pfandbriefe listed on the Frankfurt Stock Exchange.

14 14 MiFID: Best Execution and Market Transparency Explicit costs The MiFID states that execution costs are particularly important to the best execution of orders placed by retail clients. Order execution where the total fee, i.e. the price of the fi nancial instrument plus the execution costs, is particularly low offers the best possible result. The fees imposed by the investment firms themselves also have to be taken into account. Our services The order-based price model in the electronic Xetra trading system allows the execution of orders from private investors, in particular, at extremely low prices and without commission being charged. Partial executions that are generated during the matching process in the fully electronic market model are not calculated in trading and are offset during settlement depending on their status. The 22 authorized lead brokers on the Frankfurt Stock Exchange act as neutral intermediaries and help to balance the market during fl oor trading. They charge a fee for this, and fully execute client orders in return. With a full execution rate of percent in equities trading, unexpected transaction costs are avoided. Favorable fee caps are in place for structured products, 12 being the maximum fee for investment products and 3 for leverage products. There are currently plans to introduce an order-based price model for the Frankfurt trading fl oor that will enable transparent transaction costs that can be calculated in advance. Speed/execution speed The speed measures the period of time between the moment at which a client order is received and the time at which execution is confi rmed by the selected trading venue. This depends on a number of different criteria: including the market model used (e.g. ongoing auctions, quote-based price determination), the performance and maturity of the systems employed (e.g. with respect to the limit monitoring systems). Our services The Frankfurt Stock Exchange ensures rapid order execution with ongoing performance analysis in equities trading. Instantaneous execution, i.e. in a matter of milliseconds, is guaranteed in Xetra trading by the fully electronic market model: matching in the order book is performed as soon as the order is received. The transaction confi rmation is dispatched immediately when the order has been executed. The average execution time for fl oor trading in DAX stocks, for example, averages 11 seconds. The transaction confi rmation is sent out as soon as the order has been executed. The continuous improvement of execution times is supported by the use of limit control systems for equities (since the beginning of 2005) and structured products (since mid-2003), which are compulsory for all lead brokers. A system enabling partially automated price determination is already in use, aiming to execute orders immediately as soon as a situation enabling execution arises.

15 MiFID: Best Execution and Market Transparency 15 The Smart Trading segment already guarantees order execution within 30 seconds. Around 75 percent of all orders are now executed in less than ten seconds. The transaction confi rmation is sent out as soon as the order has been executed. Technical system enhancements such as the introduction of automatic trading means that the order execution time is constantly being reduced and is subject to technical monitoring on an ongoing basis via the performance measurement system. A performance analysis will be introduced in the near future for bonds and actively management funds that will further reduce the execution times for these products, among other things. Bonds in the Select and Prime Bonds segments are already executed in a maximum of 90 seconds at present. Likelihood of execution and settlement The more liquidity is available at a trading venue, the likelier it is that supply and demand for a particular fi nancial instrument will match and the order can be executed. Actual order book depth, in particular, has to be taken into account in this respect. The tradability and related likelihood of execution is not necessarily guaranteed by the mere duplication of supply on the home /reference market. This means that original liquidity at a trading venue is key for determining the likelihood of order execution. If such liquidity is not available at all or only available to an insuffi cient degree, this can result in delays in order execution. Market models with fixed execution obligations for intermediaries, such as those that already apply on the Frankfurt Stock Exchange, also increase the likelihood of execution considerably. Clearing and settlement are a sine qua non on the Frankfurt Stock Exchange for both market models intermediary-based trading on the floor and fully electronic trading on Xetra. Only verifi ed securities are admitted. The Central Counterparty (CCP) allows you to benefit through anonymized transactions, the assumption of risk in the event of counterparty default and lower explicit costs by means of corresponding netting. The CCP processes up to 10 million trades a month at peak times. Our services The Frankfurt trading floor and Xetra guarantee a high likelihood of execution thanks to the high level of liquidity. The performance analyses mean that key performance indicators on execution quality are available for Frankfurt Stock Exchange fl oor trading and Xetra. These provide information on the speed and likelihood of execution, and in the case of fl oor trading, on partial executions and the spread. Performance analysis in intermediary-based trading: ensuring high-quality quoting and execution The Frankfurt Stock Exchange enables trading in equities, bonds, and structured products, as well as both passively managed funds (exchange-traded funds, ETFs) and actively managed funds. The highest quality standards apply and are monitored on an ongoing basis by means of performance analyses. The following overview sets out the criteria that apply to the performance analyses based on the products that are tradable on the Frankfurt Stock Exchange.

16 16 MiFID: Best Execution and Market Transparency Equities The lead brokers that trade in equities on the Frankfurt trading fl oor regularly achieve consistently high results, meeting the performance analysis criteria with an average score of percent at present. The daily analysis of pricing and execution quality for equities in continuous trading on the fl oor covers seven criteria that are set out in fi gure 3. Fig. 3: Equities performance analysis: seven criteria on the monitoring of pricing and execution quality Phase Criterion Rather, the availability of issuer quotes and the execution speed are the most important factors for investors. Both parameters are subjected to an ongoing technical measurement procedure on the Frankfurt Stock Exchange and are monitored to allow immediate reaction to any problems. The data on execution speed broken down by individual issuer have also been available to the public since May 2007 at and can represent an additional criterion when it comes to selecting a product. Fast execution guarantees immediate notifi cation in the form of a transaction confi rmation for leverage products. Pricing Early quote Quote presence Quote traffic Quote spread Fig. 4: Structured products performance analysis: criteria on the monitoring of pricing and execution quality Phase Criterion Order execution Execution time Partial execution Execution quality The minimum requirements per instrument are set out in the rules and regulations of the Frankfurt Stock Exchange. The results of the analyses are calculated at various aggregation levels (e.g. index level, country level etc.). They can be used in regular reviews of execution policies, and also help to ensure that actual compliance with the execution policy can be monitored. Certificates and warrants The performance analysis for structured products takes into account the pricing and execution quality (see fi gure 4). Since issuers also act as market makers on the market for structured products, provide buy and sell prices for their own products on an ongoing basis and given that the majority of the over 180,000 products are generally traded against the issuer, order book liquidity does not determine execution quality on this market. Pricing Order execution Quote availability Proportion of executions within 10 /30 seconds, broken down according to issuer Actively managed funds The pricing and execution quality offered by fund trading specialists on the Frankfurt Stock Exchange will also be subject to performance analysis in the future. This procedure takes six criteria into account (see figure 5).

17 MiFID: Best Execution and Market Transparency 17 Fig. 5: Fund performance analysis: six criteria on the monitoring of pricing and execution quality Phase Pricing Order execution Nature of the order Criterion Quote availability Adherence to the maximum spread Adherence to the minimum quotation volumes Average execution time in seconds Executions compared with the specialist quote Non-executions despite executability The client is responsible for clearly indicating the type of order in question. Orders can be limited, restricted to a certain period of time, or can be stop-loss or stop-buy orders. Our services Deutsche Börse offers its clients all of the most common order types on both trading platforms (fl oor trading and Xetra): Type of client Investment fi rms must classify their clients by client group, differentiating, at the very least, between small retail clients, professional clients and suitable counterparties. A professional client must possess the experience, knowledge and expertise to make his own investment decision and properly assess the risks that it incurs (see Annex II of the MiFID). Our services The client classification requirements mean that companies must record and maintain accurate business partner data. Avox, a subsidiary of Deutsche Börse AG, supports financial services providers in their efforts to meet the respective validation requirements with respect to institutional client data. Avox researches the required key performance indicators (e.g. total assets, net annual turnover and capital), in accordance with the MiFID requirements and splits the clients into suitable counterparties, professional clients and private clients on request. The client databases are also compared with Avox s master data, whereby data records can be researched and corrected and returned with a corresponding status mark ( corrected or verifi ed and confi rmed ). Avox gives each business partner a unique ID (Avox ID) that allows market participants to quickly and precisely identify the parties involved in a transaction process. Limit orders with upper or lower price limit Orders restricted to a certain period of time Stop loss /stop buy orders Fill-or-kill orders (only in Xetra execution either in full or not at all) Immediate-or-cancel orders (only in Xetra execution either immediately or not at all)

18 18 MiFID: Best Execution and Market Transparency Type of security The weightings assigned to the various different aspects of order execution price, costs, speed, etc., when selecting a trading venue depend to a considerable degree on the fi nancial instrument in question. Specifi c aspects are important depending on the instrument. Post-trade transparency for OTC transactions Deutsche Börse already publishes comprehensive pre and post-trade transparency data, not only on its own markets. With the implementation of the MiFID, the system infrastructure used for this purpose will be adjusted accordingly and made available to Deutsche Börse clients, so that they can meet their post-trade transparency obligations with respect to OTC transactions. Post-trade transparency obligation The implementation of the MiFID directive means that investment fi rms are required to announce to other market participants their off-exchange purchases and sales of shares and certifi cates representing shares which are admitted to a regulated market in the EEA. Among other things, MiFID sets out the requirement to check the data and to publish it within a maximum of three minutes of the transaction time. Each transaction must be made transparent separately and only once. We offer you the MiFID OTC Post-trade Transparency Service to enable you to meet your requirements. This service allows you to simply publish those OTC transactions which are subject to reporting requirements via Deutsche Börse. Deutsche Börse s system ensures the quality of the data, as well as publication in real-time. Your benefits at a glance Fulfi llment of the post-trade transparency requirements set out in the MiFID Directive with minimal expense for institutions Coverage of all shares and certifi cates representing shares traded throughout the EEA Reporting via Xetra interface or Xetra-GUI Quality assurance of the data in accordance with MiFID requirements Optional fully-automated delay of the publication of major transactions in accordance with MiFID Identifi cation of the publishing party possible on an optional basis per transaction through fl exible use of the trading venue ID code as BIC code, OTC or SI End-of-day compliance report also as proof that regulatory requirements have been met Worldwide dissemination to information providers by publishing data via Deutsche Börse CEF data feed Attractive price model and optional commission

19 MiFID: Best Execution and Market Transparency 19 Details of the service components The MiFID OTC Post-Trade Transparency Service offers you the following services: Assurance of data quality Data records transmitted to Deutsche Börse are compared with the current list of all instruments that are subject to a MiFID post-trade transparency obligation. This reduces your expense, as Deutsche Börse ensures that only instruments subject to the MiFID are published. Plausibility checks for price and volume mean that the data published is quality-assured conspicuous transactions are marked correspondingly at publication and are sent back to clients directly for checking. The syntax of transmitted data is also checked. Delayed publication of large transactions The publication of transactions executed off-exchange for your clients against the company s own book can be delayed under MiFID. Deutsche Börse delays publication of transactions marked accordingly on a fully automated basis. Publication via CEF Your reported off-exchange trading information is disseminated via the real-time data feed CEF. As a general rule, this guarantees market publication within milliseconds of transaction entry. The large number of information providers connected to CEF ensures the broad publication of the relevant data. Flexible use of trading venue identification You can set the identifi cation of the trading venue fl exibly for each transaction, as OTC, SI or your own BIC. Using your BIC for publication may boost your marketing activities. End-of-day compliance report You will receive your MiFID end-of-day compliance report on a daily basis. This report also serves as proof that supervisory requirements have been met. It includes a Deutsche Börse time stamp, among other things, meaning that it can also be used as confirmation that the 3-minute deadline was adhered to. In addition, this report provides a seamless overview of all trading data transmitted and published on this day, along with information on the publication delays for major transactions. Deutsche Börse is able to store the reports for up to fi ve years. Using existing connections You have the option of using the following connections for the Deutsche Börse MiFID OTC Post-trade Transparency Service: Xetra GUI Xetra Values API You can access Xetra from 7.30 a.m. to 8.00 p.m. CET on regular trading days to enter your transactions executed off-exchange. Entry on behalf of third parties You also have the option of reporting off-exchange transactions executed by third parties on their behalf, e.g. for institutions without a Xetra membership. Schedule The Xetra Release 8.1 modifi cation announcement is now available to interested institutions. The Xetra 8.1 Development Guide will be available in June The client simulation is due to start in mid-september, with production due for launch in October 2007.

20 20 MiFID: Best Execution and Market Transparency Deutsche Börse s MiFID Services on the Internet You can fi nd further information and details about the MiFID on our website at deutsche-boerse.com /mifi d As of August, this site will give you access to monthly reports on execution quality for various instruments from both Frankfurt Stock Exchange market models. You can already access historical data for domestic and foreign equities, as well as for exchange-traded funds, for both 2006 as a whole and for the completed quarters of Detailed information on aggregation opportunities domestic and foreign equities In the case of equities, data can be accessed at domestic and foreign index level, as well as at country level. Certificates and warrants As of August 2007, reports can be aggregated at the level of the defi ned product groups (investment and leverage products) and categories (reverse convertibles, basket certificates, bonus /partial protection certificates, discount certificates). Funds For actively management funds, there are plans to allow aggregation at product category level (equity funds, index funds, bond funds, money market funds / quasi-money market funds).

21 MiFID: Best Execution and Market Transparency 21 Frankfurt Stock Exchange: The Market Leader for Prices, Low Costs and Speed

22 22 MiFID: Best Execution and Market Transparency Your Points of Contact If you have any questions on best execution, accountability requirements and reporting, please contact: Stock Market Business Development Sales Andreas Willius Nicole Geißler Enrico Schwenke Phone +49-(0) smbd.mifi If you would like to know more about Deutsche Börse s services for transaction reporting in accordance with section 9 WpHG, please contact: Market Data & Analytics Backoffice Data & Analytics Steffi Eimer Phone +49-(0) [email protected] If you want to know more about Deutsche Börse s client data classifi cation and pre and post-trade transparency services, please contact: Market Data & Analytics Stefan Sachsenweger Phone +49-(0) Christiane Baumgarten Phone +49-(0) Mario Michael Schultz Phone +49-(0) mda.mifi [email protected]

23 MiFID: Best Execution and Market Transparency 23

24 24 MiFID: Best Execution and Market Transparency Published by Deutsche Börse AG Frankfurt / Main June 2007 Order number: List of registered trademarks CEF, DAX, Eurex, FWB, MDAX, SDAX, TecDAX, TRICE, Xetra and Xetra BEST are registered trademarks of Deutsche Börse AG. Disclaimer This brochure is designed for general informational purposes only and does not constitute advice. Deutsche Börse AG is not liable for any errors or omissions.