ORDER EXECUTION AND BROKER SELECTION POLICY - PROFESSIONAL - ING INVESTMENT MANAGEMENT

Transcription

1 ORDER EXECUTION AND BROKER SELECTION POLICY - PROFESSIONAL - ING INVESTMENT MANAGEMENT 17 December 2013

2 INFORMATION SHEET Target audience: Employees of ING IM International (legally represented by ING Investment Management Holdings N.V.). Professional clients of (subsidiaries of) ING Investment Management Holdings N.V.. 1 Issued by: ING Investment Management Holdings N.V.. 2 For further information: ING IM Compliance address: INGIM Compliance (outlook), ingim.mbx11m079@ing.com + 31 (0) Valid from: 17 December 2013 Approval: The ING IM s Brokerage & Trading Committee, as delegated by the Management Team of ING Investment Management, approved this policy on In the event of any discrepancies between the English version of this document and a translated version, the English document is binding. 1 Professional clients include (but are not limited to) all investment funds managed by ING Investment Management Advisors B.V., ING Fund Management B.V., ING Asset Management B.V., ING Investment Management Luxembourg S.A., ING Investment Management Belgium S.A., ING Investment Management International LLC, ING Investment Management Asia Pacific (Singapore) Ltd and ING Mutual Funds Management (Japan) Ltd. 2 ING Investment Management Holdings N.V. include (but are not limited to) ING Investment Management International LLC,, ING Investment Management Europe B.V., ING Investment Management Advisors B.V., ING Fund Management B.V., ING Asset Management B.V., ING Investment Management Luxembourg S.A., ING Investment Management Belgium S.A., ING Investment Management Asia Pacific (Singapore) Ltd and ING Mutual Funds Management (Japan) Ltd. December

3 CONTENTS 1. INTRODUCTION OBJECTIVES and SCOPE...5 BROKER SELECTION EXECUTION VENUE APPROVED BROKER LIST BROKER SELECTION CRITERIA BROKER EVALUATION...7 ORDER EXECUTION EXECUTION POLICY SPECIFIC INSTRUCTIONS and OTHER EXCEPTIONS TO BEST EXECUTION POLICY MONITORING AND REVIEW OF THE POLICY AVAILIBILITY OF THIS POLICY December

4 1. INTRODUCTION As an investment firm, ING Investment Management 3 ( ING IM ) holds a duty to act honestly, fairly and professionally in accordance with the best interests of its clients. When executing orders, investment firms are held to take all reasonable steps to obtain the best possible result for their clients. ING IM has a duty to ensure that, when executing transactions directly with other parties (hereinafter a broker, counterparty or intermediary) or in the event of placing or transmitting orders with a broker for execution, it obtains the best possible result for its clients; the so called best execution. In general, to meet the duty of best execution, each trader or investment manager must ensure the execution of transactions is such that the total cost or proceeds in each transaction are the most favourable under the prevailing circumstances. Since the concept of best execution is not limited to solely obtaining the best price and lowest transaction costs, the full range of a broker s services, including among others, price, the value of research provided, execution capabilities, speed and likelihood of execution, quality of execution, speed and likelihood of settlement, financial responsibility, administrative resources, size and nature of the order, risk management considerations and responsiveness to enhance the overall value of a client account for both short term and long term, may be considered. For the transposition of these duties, ING IM deems the interests of clients best served with a transparent view on the selection of and allocation to brokers when executing orders in financial instruments. The criteria for the selection of brokers by ING IM, in view of the best execution obligations, have been laid down in this policy (the Policy ). In addition there is the INGIM Counterparty and Broker policy which sets out the governance concerning on counterparty risk management and counterparty and broker approvals to create the approved broker list from which the broker selection can take place. Moreover, the Policy contains a description of the procedure for evaluation of a broker s performance and a procedure for monitoring and review of the effectiveness of this Policy. The policy, adherence to the policy, broker selection and evaluation are monitored by the ING IM s Brokerage & Trading Committee. 3 ING IM encompasses the legal entities ING AM Interfinance Services B.V., ING Asset Management B.V., ING Investment Management Advisors B.V., ING Investment Management Belgium N.V., ING Fund Management B.V., ING Investment Management Luxembourg S.A. ING Investment Management (Polska) SA, ING Investment Management (C.R.), a.s., ING Investment Management closed Co. Ltd., Investment Management International LLC, ING Investment Management Asia Pacific (Singapore) Ltd and ING Mutual Funds Management (Japan) Ltd.). This policy applies to the activities of ING AM Interfinance Services B.V., ING Asset Management B.V., ING Investment Management Advisors B.V., ING Investment Management Belgium N.V., ING Fund Management B.V., ING Investment Management Luxembourg S.A., Investment Management International LLC, ING Investment Management Asia Pacific (Singapore) Ltd and ING Mutual Funds Management (Japan) Ltd.) December

5 2. OBJECTIVES and SCOPE The objective of this Policy is to establish and describe the process for ING IM for the selection of brokers within the specific approved broker list (OTC derivatives, DVP and FOP trades 4, deposits, securities lending and repurchase agreements), most likely to deliver the best possible result in the execution of transactions in financial instruments for ING IM s clients. This includes a decision to trade for a client s account as part of the portfolio management. This Policy will be available to ING IM s clients to provide transparency on ING IM s policy on best execution owed to the clients and as required by applicable law. This Policy also describes the selection process for brokers in relation to financial instruments, amongst others within the meaning of Annex 1 Section C to MiFID 5 and in UCITS IV 6 as transposed in national legislation. The scope is limited to transactions in those financial instruments that ING IM and its clients have agreed on in the context of the portfolio management mandate with ING IM. The Policy applies to the relationship between ING IM and any professional client (within the meaning of Annex II to MiFID and UCITS IV, as transposed in national legislation). BROKER SELECTION 3. EXECUTION VENUE The brokers, counterparties and intermediaries with whom ING IM does regular business may choose to execute ING IM s orders on Regulated Markets, on Multilateral Trading Facilities (MTF s), with systemic internalisers or on their own book. ING IM has given explicit authorisation to its brokers, intermediaries and counterparties to carry out the execution of its orders on all these different execution venues. The selection procedure described below indicates if and when transactions are executed on the book of a counterparty or if and when transactions are executed (by 4 OTC (Over-the-Counter) is defined as derivatives that are traded (and privately negotiated) directly between two parties, without going through an exchange or other intermediary. FOP (Free of Payment) is defined as securities trading where a client's custodian will have to release payment or deliver securities on behalf of the client before there is certainty that it will receive the counter-value in cash or securities. DVP (Delivery versus Payment) is defined as securities trading where the buyer's payment for securities is due at the time of delivery. Security delivery and payment are simultaneous. 5 European Union Directive 2004/39/EC on Markets in Financial Instruments 6 European Union Directive 2009/65/EC on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) and European Union Directive 2010/43/EU implementing Directive 2009/65/EC of the European Parliament and of the Council as regards organisational requirements, conflicts of interest, conduct of business, risk management and content of the agreement between a depositary and a management company. December

6 a broker) on a specific regulated market, multilateral trading platform or other execution venue. Those execution venues of which ING IM believes that they will enable it to obtain best execution on a consistent basis, will from time to time be included. 4. APPROVED BROKER LIST Transactions for an account may be executed only with or through brokers that meet prescribed minimum requirements applied by ING IM. The approved broker list may include any brokerage firm, which the trading desk or investment managers believe can add value to the investment management process, subject to a quality check performed by Credit Risk Management, Legal and Compliance teams. The Credit Risk Management department maintains a sub-list of approved/preferred brokers, relevant per type of financial product, which are eligible to be selected for a specific trade. Transactions can be executed with all counterparties of the approved broker list, providing operational set-up. If a broker is not on the approved broker list, transactions cannot be executed using such broker. However, if an investment manager or trader views that, given specific circumstances, it is in a client s best interest that a certain broker is added to the approved broker list, such broker may be added to the list following ING IM s internal application procedure. This procedure is highlighted in the INGIM Counterparty and Broker policy 5. BROKER SELECTION CRITERIA ING IM will only allocate trades to brokers that are stated on the approved broker list. In the selection process of brokers (as well as the evaluation thereof as discussed below) for trades, ING IM considers a number of factors, which may include (but does not necessarily involve all of) the following: 1. the quality and effectiveness of a broker s execution policy, if relevant, in order for a broker to reach the best possible result for ING IM s client 2. the broker s ability to provide the best price and to maximize the opportunity for price improvement 3. the broker s ability to search for and obtain liquidity to minimize market impact and accommodate unusual market conditions 4. the broker s ability to maintain and commit adequate capital when necessary to complete trades 5. the broker s ability to complete trades, to complete trades quickly and to minimise the number of incomplete trades 6. evaluation, pre and post trade 7. access to specific markets (e.g. Russia) December

7 8. flexibility: is the broker able to execute unique trading strategies/execute and settle difficult trades as well as unusual trading volumes 9. quality, offering, speed of electronic execution methods and program trading (ability to execute multiple transactions) 10. discreteness: is the broker able to maintain the confidentiality of an order 11. efficiency and accuracy of the broker s clearance and settlement process, including our split across clients 12. timely and accurate provision of execution reports 13. the level to which the broker exercises efforts to satisfy trading needs in a diligent and consistent manner and a proven track-record of the broker (measured by for example hit-ratios) 14. the level to which the broker is responsive to comments or to complaints regarding erroneous trades and its responsiveness to account for and correct such errors in a satisfactory manner 15. the broker s ability to engage in after-hours and cross-border trading 16. quality and quantity of information flow, with respect to specific companies, countries and industry and/or regarding specific instruments 17. availability and quality of a broker s own or third-party research or access thereto 18. availability and quality of a broker s traders, strategists, analysts, etc. 19. response time and adequate lines of communication with broker s staff and traders 20. a broker s ability to anticipate on, adopt and have access to alternative trading options with a view on achieving higher quality execution. 21. Risk management: Limit observation and counterparty diversification considerations 22. any other factor(s) ING IM deems relevant in selection of a broker. The decisive factor for allocation between different brokers of a specific trade, as well as the relative importance of the above criteria depends on various factors as further explained below. 6. BROKER EVALUATION At least on a semi-annual basis, the investment professionals (e.g. portfolio manager, analyst, trader, etc.) shall rate the brokers according to the selection criteria discussed above. In performing a broker s evaluation, the execution quality of such broker can be assessed. The results of this evaluation process are reported to the ING IM s Brokerage & Trading Committee. The evaluation process and outcome is documented, either in paper format or electronically, and maintained by ING IM for at least seven years. In principle, each asset class (Equity, various Fixed Income Instruments, OTC derivatives and FX), uses its own sub-list of approved/preferred brokers (the Broker List) in its own broker evaluation. Each category of investment professionals (specific Investment Boutiques, Central Dealing, Management, Corporate Analytics, Mid December

8 office/trade support) have a specific part in (one of) the vote(s) and will evaluate the brokers on the Broker List semi-annually by performing a rating process through voting. The voting process is performed online via customized software provided by third party vendor(s) and will eventually determine which brokers are used for ING IM s transactions. For Equity instruments ING IM may also hire a third party vendor (e.g. Abel Noser, Plexus/ITG, or Elkins McSherry) to measure and evaluate the trading practices. Generally, these vendors analyse the executed price received and transaction costs for historical trades. They generally do not include the qualitative features, such as research or service, offered by the brokers in their analysis. Results from the vendor s analysis may be considered in the voting process described above. For Fixed Income, Foreign Exchange and OTC Derivatives the hit-ratios of the transactions put in competition may be used to evaluate the trading practices. ORDER EXECUTION 7. EXECUTION POLICY In general, the selection process of brokers in relation to best execution is largely driven by the specific characteristics of the type of instruments, their intrinsic characteristics and specific markets. In addition it is relevant to note that specific instruments (as explained under Fixed Income and non-listed Derivatives) lack or at least have limited price transparency. As a result, trades can be effected OTC through bilateral negotiations, and not through Regulated Markets or MTF s. For each execution of a transaction, a broker will be selected on the basis of (a selection of) the above criteria. In addition, when selecting the broker for execution of the trade, ING IM will take into account criteria specific for the transaction, which will include the price and costs, speed and likelihood of execution and settlement of the trade, the size and nature of the order, impact on the market and proprietary risk criteria. Within such context, the client s classification as professional client, characteristics of the order, the relevant financial instruments and execution venues will be taken into account. ING IM will verify the existence of the broker s own execution policy to the extent such is relevant (which for example, will not be the case if the transaction is executed directly by ING IM itself). Furthermore, with respect to brokers used for trading through trading algorithm (s), ING IM will verify the broker s adherence towards the ESMA issued guidelines on Systems and controls in an automated trading environment for trading platforms, investment firms and competent authorities. Price will generally have a high relative importance in obtaining the best possible result. However, ING IM may nevertheless decide not to execute a trade through such broker if it, in assessing all other remaining factors, decides that such other factors outweigh the price and costs of the transaction. December

9 If and when the trade-specific criteria mentioned above, will not differentiate between any of the brokers included in the Broker List (e.g. in case of very liquid orders), trades can be executed in such way as to reach the allocation targets of the broker evaluation (see below: Broker Evaluation). Listed derivatives The clearing broker for ING IM has been selected by a request for proposal process, based on service, settlement facilities, price and reporting tools and is appointed for a fixed period. All listed derivatives (i.e. options and futures) are traded by using an execution broker who must have a give up agreement with the clearing broker and ING IM (or specific clients). The execution broker has discretionary power to execute the client order on a regulated Market, a MTF, a (system of) internalization or on his own accounts. Equities Transactions in equity financial instruments are generally performed by using one of the following methods: algorithmic trades, cash desk trades or program trades. All types of trades may result in trade execution on a Regulated Market if such is deemed the most appropriate under the prevailing market circumstances. However, they may also result in an execution outside a Regulated Market or MTF s, for example by crossing trades by the relevant broker. ING IM will use its own judgment and experience in determining which method it will use dependent on the specific (market) circumstances and other criteria mentioned above. Fixed Income A relatively large part of the fixed income instruments that are traded have limited price transparency, or are only to a limited extend available in the market. Fixed Income instruments are executed in the primary and secondary market. Counterparties usually take trades which are executed in the secondary market with ING IM on their own accounts. Small to average size orders in bonds are executed via electronic trading, chat or telephone and can be traded in competition. Records are kept of the competing quotes. Larger size bond orders and orders in illiquid bonds or illiquid markets are executed through bilateral negotiations with one counterparty. This is done in order not to disturb the market and obtain a discrete and quick execution. These brokers can be specialised in these bonds, bond markets or have special abilities in these products or markets. On a daily basis there is intensive contact between the brokers and ING IM about market developments, flows or special demand or offers in the different markets. Non listed derivatives and Foreign Exchange (instruments) In pursuing the best possible execution ING IM will take the criteria mentioned above into account and additionally will take into account other criteria such as, quality of the counterparties, quality of the legal documentation and agreements with the counterparties including any risk criteria and current exposure to the December

10 different counterparties. Transactions in these instruments can only be carried out with counterparties which have legal documentation and agreements set-up and signed with ING IM. ING IM reviews allocated sizes and exposure per counterparty. Depending on the transparency of pricing and the perceived liquidity of the instruments the orders can be placed in competition and where possible a minimum of two brokers will be contacted to quote. The number of counterparties used depends on a number of factors (e.g. size, complexity of the trade, discreteness). Pricing tools and levels quoted by counterparties of ING IM on trading systems are also used as a reference. Crossing and aggregation Crossing a transaction (in-house or with an external party) is possible in all instruments mentioned above (where permitted by applicable laws and regulations). In addition, the trading desk can aggregate orders provided such aggregation is in accordance with ING IM s Trade Aggregation and Allocation Policy. INGIM may also work with limits or contingent orders or specific other instructions if ING IM considers this to be in the interest of its clients. 8. SPECIFIC INSTRUCTIONS and OTHER EXCEPTIONS TO BEST EXECUTION POLICY ING IM s business entails that it generally does not act on the basis of specific client instructions to place trades through a specific broker or through a particular type of broker. However, where the relationship with its clients so permits and to the extent that ING IM acts on the basis of clients specific instructions, ING IM s clients should be aware that such specific instructions may prevent ING IM from taking the steps set out in this Policy to obtain the best possible result in respect of the elements covered by those instructions. This policy will not apply in case of specific instructions. In addition to the aforementioned, the best execution policy will generally not apply to transactions with respect to highly customised financial products, which are tailored to circumstances specific for a client and its account or if a transaction, executed by ING IM itself, regards a financial instrument relating to one particular execution venue only. Also in addition to the aforementioned, the duty to meet best execution can also be reached in case ING IM makes use of a facilitating broker, acting as an Agent Broker if the trades executed through this Agent Broker, although showing as done with one counterparty in the files of ING IM, are actually performed with a variety of counterparties of that Agent Broker, in accordance with the principles of the Policy. Mutual Funds Subscription, redemption and conversion transactions relating to units in UCITs and UCIs are executed through the relevant funds transfer agent at net asset value December

11 (NAV). INGIM considers subscription, redemption or conversion of UCI shares or units executed at the NAV as fulfilling best execution criteria. 9. MONITORING AND REVIEW OF THE POLICY Identifying deficiencies of the Policy The effectiveness and accuracy of this Policy, acting in accordance with it and the principles and procedures contained in it will be monitored on a continuing basis by ING IM s Brokerage & Trading Committee. The monitoring will, inter alia, be aimed at assessing on a continuous basis the execution quality of the brokers selected pursuant to this Policy, as follows from the evaluation of brokers in accordance with the evaluation process described above, as well as ING IM s own ability to reach the best possible result for its client when executing transactions. In addition, where ING IM identifies shortcomings in its abilities to obtain the best possible result for its clients, such deficiencies will be detected and addressed appropriately in a revision of this Policy. Annual review At least annually, or so much sooner in case of a material event necessitating such, ING IM will review this Policy on ING IM s ability to continue to deliver to its clients the best possible result in the execution of orders. The review of the Policy will entail a consideration whether ING IM continues to deliver best execution or could deliver better execution if, for example, it includes additional and/or other brokers/execution venues or if it makes any other amendments to this Policy. 10. AVAILIBILITY OF THIS POLICY The most up-to-date version of this Policy shall be available from ING IM s website at Any material changes to the Policy from time to time shall be communicated to ING IM s clients at least through its website. Upon client s request ING IM shall send a copy of the latest version of this Policy to the client. December