Polunin

MIFID 2 – RTS28

RTS28-Equity-Derivatives-Dec-2020RTS28-Equities-Dec-2020

RTS 28 Report for the year ending 31st December 2020

EU Regulatory Technical Standard 28 (RTS 28) Report including information required under Article 3(3) regarding the monitoring of execution quality on the execution venues where the Firm executed client orders, in the year ending 31st December 2020.

(a) an explanation of the relative importance the Firm gave to the execution factors of price, costs, speed, likelihood of execution or any other consideration including qualitative factors when assessing the quality of execution;

Polunin Capital Partners Limited (“the Firm”) has conducted an analysis of the Execution Factors as directed by Art 27(1) of MiFID II and how these apply to the Firm’s Portfolio Management Business. A record of this analysis is set out below which has been used to inform the Firm’s Order Execution Policy.

Price: obtaining a desired execution price is the chief goal in achieving best execution for clients, and possibly the most important execution factor to try to control given the difficulty in doing so because of inherent price volatility. The key determinant in whether or not a desired price is achieved is the order instruction given to the executing broker. The chosen instruction given will be under constant review during the life of the order, and may be changed if it transpires that it does not serve in obtaining the desired execution price.

Costs: The Firm predominantly invests in listed equities on recognised stock exchanges and is therefore unable to avoid incurring the local taxes and charges levied by those stock exchanges on all transactions. These are fixed costs paid by each and every participating client, and therefore can be discounted as a factor influencing best execution.

Where the Firm is unable to invest for a client locally (for instance, because local custody is unavailable) then the Firm may seek to use over-the-counter participatory instruments issued by broker counterparties, that provide 1:1 exposure to a given local equity but priced in US Dollars. Determining the value of these OTC notes is easy as they match the share price of the underlying equity. However, there are higher charges in dealing in these instruments, and those costs will be a factor affecting overall execution outcomes, particularly when comparing those outcomes with clients that are able to transact directly in the local market.

A more variable charge that the Firm does have some ability to influence is the commission charged by an executing broker. The Firm has put in place two service tiers of execution commission structure: the lowest is a programme trade rate, whilst the higher of the two – a ‘high touch’ rate – is reserved for order that require human intervention and management from the executing broker to complete. The Firm aims to achieve commission fee parity across executing brokers for a given stock market and service tier.

Speed of execution is not critical to effect the Firm’s investment strategy; the investment time horizon is medium- to long-term and does not involve use of short-term trading strategies.

Likelihood of Execution and Settlement: The Firm employs a liquidity screen in its stock selection process in seeking to avoid choosing positions that will be difficult to transact due to poor trading volumes. While the overall size of the (aggregated) order may still influence how long it takes to be executed, the likelihood of execution will be more readily determined by the order instruction given to the broker counterparty. As mentioned previously, order instructions are monitored over the life of an order; therefore instructions may be altered by the Firm if the transaction does not take place, or is taking too long to conclude. Additionally, the Firm may select a particular counterparty to execute the trade based on its ability to be effective in that particular venue.

There are some technical barriers to execution in emerging markets, such as foreign ownership limits; these may be reached before a purchase order has been completed, in which case it may not be possible to conclude the order until a matched seller of foreign stock is found.

Settlement issues are no longer a major execution factor in emerging markets, given that the majority of venues now operate delivery versus payment. Where counterparty risk does exist, such as with the issuance of OTC participatory instruments, the Firm limits its clients’ exposure to any given counterparty to 10% of assets under management.

Size: The Firm is mindful of how the size of an order placed in a market might negatively affect the pricing outcome of trading, and therefore result in best execution not being achieved. This is certainly an issue in less liquid, or less regulated emerging stock markets where presenting a comparatively large order to buy or sell can result in market prices moving against the Firm. To try and overcome such events, the Firm seeks to manage position sizes ie by presenting only a portion of the overall position to buy or sell at any given time, and – where possible – to use alternate broker counterparties for successive portions.

Value: Since inception, the Firm has maintained a value discipline as part of its investment strategy by adding a trading liquidity component to its stock selection criteria.

Similarly, liquidity plays a part in how an order is placed with a broker counterparty, in that the default instruction from the Firm is that the order should not account for more than one third of average market volume in any given trading session. In this way, the Firm seeks to avoid its activity being a key influence on the share price in the market and so remove the risk of negatively influencing the outcome.

(b) a description of any close links, conflicts of interest, and common ownership with respect to any execution venues used to execute orders;

The Firm does not have any close links, conflicts of interest or common ownership with respect to any execution venues used to execute orders.

(c) a description of any specific arrangements with any execution venues regarding payments made or received, discounts, rebates or nonmonetary benefits received;

The Firm does not have arrangements with any execution venues regarding payments made or received, discounts, rebates or non-monetary benefits received.

(d) an explanation of the factors that led to a change in the list of execution venues listed in the Firm’s execution policy, if such a change occurred;

One additional broker counterparty was approved for trading during the year, in order to broaden the scope for executing client orders in the Indian stock market.

All broker counterparties are subject to due diligence prior to approval by the Firm’s Operating Risk Committee. The Firm has a detailed Broker Selection Policy in place to govern the approach to initiating or terminating a counterparty relationship.

(e) an explanation of how order execution differs according to client categorisation, where the Firm treats categories of clients differently and where it may affect the order execution arrangements;

The Firm’s Order Aggregation and Allocation policy, together with its commitments to Best Execution, aims to ensure fair treatment for all clients sharing the same investment strategy.

However there will be some order execution differences inherent in dealing in certain execution venues; principally those markets where execution is undertaken against a specific client identification number meaning that each client receives a unique execution price.

Between strategies, order execution may differ more noticeably. For instance, a long/short fund will execute on different execution venues from a long-only equity fund, and concentrate its activity through a prime broker rather than multiple executing brokers. In addition, trading in illiquid markets may necessitate transacting in matched blocks where trading occurs by agreement rather than at open market prices.

The Firm’s Best Execution policy – which is reviewed at least annually — sets out in detail how it seeks to achieve the best possible result for its clients when placing orders with other entities for execution that result from decisions by the firm to deal in financial instruments.

(f) an explanation of whether other criteria were given precedence over immediate price and cost when executing retail client orders and how these other criteria were instrumental in delivering the best possible result in terms of the total consideration to the client;

The Firm does not execute retail client orders.

(g) an explanation of how the investment firm has used any data or tools relating to the quality of execution, including any data published under Delegated Regulation (EU) 2017/575 [RTS 27];

The portfolio manager that places the order will follow it through to execution, which normally takes less than one day, to ensure our Best Execution policy has been adhered to. The operations team produces a daily VWAP report, which is distributed to all portfolio managers, highlighting any trades greater than 20bps away from VWAP.

Portfolio managers review the daily VWAP reports produced by the operations team; for any transaction > 0.25% away from VWAP they may seek a detailed explanation from the executing. All transactions are formally reviewed during the quarterly Compliance Committee meeting, where the performance of each broker over the quarter is discussed and any patterns of poor execution noted (which may lead to a broker being removed from the approved broker list).

There were no broker counterparties sanctioned for poor execution quality during the year.

(h) where applicable, an explanation of how the investment firm has used output of a consolidated tape provider.

The Firm does not use output from consolidated tape providers.