Execution of orders on behalf of clients (MiFID definitions)

European Union Electricity Market Glossary

'Execution of orders on behalf of clients' means acting to conclude agreements to buy or sell one or more financial instruments on behalf of clients and includes the conclusion of agreements to sell financial instruments issued by an investment firm or a credit institution at the moment of their issuance (Article 4(1)(5) of MiFID II Directive).

Execution of orders on behalf of clients is included in the Section A (Investment services and activities) of the MiFID II Annex I point 2.

A specific form of execution of orders on behalf of client is a matched principal trading.

It has been underlined by the the UK Financial Conduct Authority (Markets in Financial Instruments Directive II Implementation – Consultation Paper I (CP15/43), December 2015, CP15/43, p. 262) "If a firm executes client orders by standing between clients on a matched principal basis (back-to-back trading), it is both dealing on own account and executing orders on behalf of clients".

Another important observation on the regulatory scope of the "execution of orders on behalf of clients" has been made by the European Banking Authority (EBA) in theReport on Investment Firms, Response to the Commission's Call for Advice of December 2014 (EBA/Op/2015/20, p. 18).

EBA noted that "the combination of MiFID investment services for which an authorisation is necessary and which is required in order to carry out certain activities differs between Member States. In most Members States, an authorisation to exercise reception and transmission of orders (MiFID A1) is mandatory for the execution of orders (MiFID A2), but there are exceptions.

Another example is that order execution on behalf of clients may be assumed in those cases where the investment firm acts on behalf of the client but places the order on the market in its own name. Being the only contractual partner of its client, the firm has an obligation against the client to deliver the financial instruments purchased on their behalf. Whereas this situation leaves the firm without any market risk, since the parties agree that the client would bear the economic risk of the transaction, the firm may remain in principle exposed to credit risk towards both the market counterparts and its client, leading to concerns about whether such a service would fall under the execution of orders (MiFID A2) or would be seen as a market 'risk free' form of principal trading. When execution on behalf of clients has been implemented as referred to above, the distinction between such firms and those that may be authorised to undertake deals on own account (MiFID A3)—but only for the purposes of executing client orders in accordance with the conditions set out in point (a) of Article 96(1) of the CRR—appears blurred. In such a context, stricter initial capital and own funds requirements could be necessary."