Best Execution | Derivatives Compass

Best execution in Japan is the duty of financial instruments business operators and similar firms to set and publish a policy for executing client orders on the best terms, and to follow it. The duty covers only sales and purchases of listed shares and similar securities, and derivatives transactions are excluded by Cabinet Order. The EU, the UK, and the US have separate provisions requiring firms to do their best in executing client orders.

Financial instruments business operators and similar firms that receive and execute client orders come under this regulation when they set and publish an execution policy and give clients information and explanations about it.

What the rules require

Best execution rules require a firm to decide which market and which method it uses to execute client orders, to tell clients about that policy, and to follow it.

In Japan, the Financial Instruments and Exchange Act (FIEA), together with a Cabinet Order and a Cabinet Office Order, imposes the duty to set this policy. The EU, the UK, and the US also have best execution provisions. Whether the execution of a particular order meets the provisions is for the authorities to judge on the facts.

The Cabinet Order is the Order for Enforcement of the FIEA, and the Cabinet Office Order is the Cabinet Office Order on Financial Instruments Business. These English names are working translations.

Suppose Securities Firm B (a fictional firm) receives a sell order for listed shares from an individual client. It sets a policy on which of several exchange markets and similar venues to route the order to, shows the policy to the client, and executes the order in line with it. The policy duty does not extend to quoting or executing a derivatives transaction.

Which transactions the Japanese best execution policy covers

The FIEA requires a financial instruments business operator to set a policy and method for executing client orders on the best terms for sales and purchases of securities and for derivatives transactions (excluding those specified by Cabinet Order). The statute calls this policy and method the "best execution policy, etc."¹

A Cabinet Order decides which transactions are covered. The Order for Enforcement lists what is excluded from the duty to set a policy: derivatives transactions, and sales and purchases of securities other than listed share certificates and similar securities, over-the-counter-traded securities, and handled securities².

Transaction	Duty to set a policy	Information before the order (paragraph 4)
Sales and purchases of listed share certificates and similar securities	Covered	Covered
Sales and purchases of over-the-counter-traded securities	Covered	Covered
Sales and purchases of handled securities	Covered	Not covered
Sales and purchases of other securities	Not covered	Not covered
Derivatives transactions	Not covered	Not covered

Listed share certificates and similar securities are share certificates, bonds with share options, and other securities listed on a financial instruments exchange. The Cabinet Office Order lists ten types, including share certificates, bonds with share options, investment trust beneficiary certificates, and investment securities. Transactions that amount to derivatives transactions are excluded from them³.

The information duty in paragraph 4 is limited to sales and purchases of listed share certificates and similar securities and over-the-counter-traded securities. In principle it does not apply when the client is a professional investor, because the FIEA lists paragraph 4 among the provisions that do not apply where the other party who applied for or concluded the contract is a professional investor. The provision does apply in cases set by Cabinet Office Order as likely to harm the public interest or the protection of professional investors⁴.

Figure 1Deciding whether the duty to set a best execution policy, etc. applies

Figure description

The figure checks, through two questions in order, whether the obligation to establish a best execution policy applies. A yes to the first question (a derivatives transaction) or a no to the second (not a purchase or sale of the covered securities) takes the case outside the obligation. If both are passed, the obligation in principle applies. The figure covers only the obligation to establish a policy.

Consider a hypothetical example in which Securities Firm B receives a client order.

Securities Firm B receives a sell order from an individual client for shares listed on a financial instruments exchange. The transaction is a sale of listed shares and is not a derivatives transaction, so it is subject to the duty to set a best execution policy, etc. The information before the order under paragraph 4 is, in principle, needed unless the client is a professional investor, and it is not needed when the firm has already provided it.
At a client's request, Securities Firm B quotes a price for an OTC derivative and the trade is executed. The transaction is a derivatives transaction, so it is outside the duty to set a policy under this provision.

The provisions were checked in October 2026. The FIEA and the Order for Enforcement are the versions effective August 12, 2026, and the Cabinet Office Order is the version effective August 3, 2026.

What the policy and the information duties require

Article 40-2 imposes five duties on firms. By paragraph, they are as follows⁵.

Paragraph	Requirement	Content set by Cabinet Office Order and others
Paragraph 1	Set the best execution policy, etc.	State, for each issue, the method of executing on the best terms and the reason for choosing it. Describe the method of execution on exchange markets and similar venues
Paragraph 2	Publish the policy	Post it or make it available for inspection at the head office and at each business office that takes orders; also post it on the website except in certain cases
Paragraph 3	Execute client orders in line with the policy	Executing contrary to the policy can lead to supervisory dispositions (see below)
Paragraph 4	When about to receive an order for sales and purchases of listed share certificates and similar securities or over-the-counter-traded securities, give the client information on the policy beforehand	Provide it in writing or by electronic means; not required if already provided
Paragraph 5	When the client asks after execution, provide an explanation that the order was executed in line with the policy, and related information	The client can ask within three months after execution, and the information must be provided within 20 days of the day the client asked

The method of execution that goes into the paragraph 1 policy has rules on how to write it. A firm may use a system that automatically selects the market with the most favorable price from several exchange markets and similar venues (a best price search system). In that case, the policy must say so. It must also state the markets whose prices are compared, and how markets are selected and in what order. In addition, it must outline the policy and measures for dealing with trading strategies that exploit market movements or price gaps between markets caused by differences in the time needed to execute orders. For an individual client's order, the policy must say so when the firm uses an in-house trading system, or when it executes mainly with a view to matters that benefit the client other than executing at the most favorable price⁶.

The information to be given to the client under paragraph 5 is set by the Cabinet Office Order. It consists of the issue, quantity, and whether the order was a sale or a purchase; the date and time of receipt; and the date and time of execution. It also includes the method of execution, such as the market used, and an explanation that the order was executed in line with the policy. For an order executed using a best price search system, the firm also provides the executed price and the most favorable price in each market compared. With the consent of a professional investor client, the period for providing the information can be extended to a period of 20 days or more⁷.

The only penalty that names this provision is a non-penal fine of up to 300,000 yen for failing to provide information in breach of paragraph 4 or paragraph 5. Executing contrary to the policy in breach of paragraph 3 is a violation of law and can lead to a business improvement order or a supervisory disposition such as a business suspension of up to six months⁸.

Best execution in the EU, the UK, and the US

The EU's MiFID II, the UK's FCA rules, and the US FINRA rule all require firms to do their best in executing client orders. They differ in who bears the duty, which transactions are covered, and what means are required.

Jurisdiction	Provision	Who bears the duty	What it requires
Japan	FIEA Article 40-2	Financial instruments business operators and similar firms	For sales and purchases of listed share certificates and similar securities, set and publish a best execution policy, etc. and follow it
EU	MiFID II Article 27	Investment firms	Take all sufficient steps to obtain the best possible result for clients, taking into account price, costs, speed, likelihood of execution and settlement, size, nature, and other factors
UK	FCA COBS 11.2A	Firms	Take all sufficient steps to obtain the best possible result for clients, taking into account the same factors as in the EU. Extends to over-the-counter products
US	FINRA Rule 5310	Members	Use reasonable diligence to find the best market, so that the price to the client is as favorable as possible under prevailing market conditions

Under the best execution article of MiFID II, when a client gives specific instructions, the firm executes in line with them. For a retail client's order, the best result is judged on the total consideration, which is the price of the financial instrument plus the costs of execution, including fees of the execution venue and clearing and settlement fees. An investment firm sets an execution policy, tells clients about it, and obtains their prior consent. When a client asks, the firm demonstrates that it executed in line with the policy⁹.

COBS 11.2A in the UK combines rules corresponding to the best execution article of MiFID II with FCA guidance. It treats a firm dealing with a client on its own account as executing the client's order. The duty to execute client orders on the best terms applies to all types of financial instruments, whether they are traded on an exchange or over the counter¹⁰.

FINRA Rule 5310 in the US applies to a member's transactions for or with a customer, or with a customer of another broker-dealer. The member must use reasonable diligence to find the best market. It must also buy or sell in that market so that the price to the customer is as favorable as possible under prevailing market conditions. The factors listed include the character of the market for the security, the size and type of the transaction, the number of markets checked, the accessibility of quotations, and the terms of the order. The duty applies not only when a member handles a customer order as agent but also when it trades on its own account. The rule covers transactions in securities¹¹.

Best execution for derivatives

Under Japan's FIEA, the best execution policy, etc. does not reach derivatives transactions. When Securities Firm B quotes a price for an over-the-counter derivative at a client's request and the trade is executed, the Order for Enforcement does not impose the duties to set and publish a policy, give information beforehand, and explain afterward¹². Suitability and explanation are covered in Suitability and the Duty to Explain.

The term "best execution" also appears in another context in over-the-counter derivatives. The FSA supervisory guidelines address a discretionary trading contract under which an OTC derivatives business operator may set prices within the scope of the client's consent. They list, as one of the consents included in a specific consent, the client requesting best execution within a day's trading and the operator then setting the consideration and the agreed figures at its discretion. This is wording in a provision separate from the best execution policy, etc.¹³.

The UK extends the best execution duty to over-the-counter products. The COBS 11.2A guidance says that a tailor-made over-the-counter financial instrument may not be comparable with a share traded on an exchange. It adds that the duty is the same over the counter, so a firm gathers market data and checks whether the over-the-counter price it shows to the client is fair. The rule requires a firm, when executing an over-the-counter product or deciding on the transaction, to gather the market data used to estimate the product's price. It also requires the firm, where possible, to compare the price with similar or comparable products, to check the fairness of the price shown to the client¹⁴.

Where a client accepts a firm's quote and trades, the COBS 11.2A guidance says that if the quote met the best execution duty when the firm gave it, executing after the client accepts it meets the same duty. The condition is that, taking into account the time between giving the quote and its acceptance and any change in the market, the quote is not clearly out of date¹⁵.

How a policy is operated

The EU and US sources contain operational provisions. MiFID II requires an investment firm to monitor the effectiveness of its execution arrangements and policy and to correct any deficiencies. The supplementary material to FINRA Rule 5310 requires a member that automatically routes orders or executes them in-house to conduct regular reviews of execution quality. If it does not review each order, it reviews by security and by order type, at least once a quarter¹⁶. In Japan, the FSA supervisory guidelines list points for a securities firm to note when it operates a best execution policy, etc. Because this policy does not reach derivatives transactions, the contents of the box do not extend to derivatives transactions either.

For complianceWhat the authorities look at in operating a best execution policy, etc.

The FSA supervisory guidelines say that, when a securities firm sets a best execution policy, etc. and executes client orders, it should note the following points¹⁷.

Whether the information on the policy is provided in an easy-to-understand way, according to the client's attributes and the firm's business model.
Whether the order routing rules of the best price search system (for example, whether orders are routed in sequence after comparing the quotes shown, or split and routed at the same time) are provided in an easy-to-understand way, according to the client's attributes.
When the firm selects its own or an affiliate's proprietary trading system or in-house trading system as a venue for comparison, or gives them priority when the most favorable prices are the same, whether it gives specific and rational grounds, taking into account the advantages and disadvantages for the client.

Under the guidelines, routing an order, after comparing prices in each market with a best price search system, to the market with the most favorable price does not, as a rule, amount to execution mainly with a view to matters that benefit the client other than the most favorable price. Routing an issue handled in several markets to a particular market without using the system does, as a rule, amount to it. When it applies to an individual client's order, the policy must say so.

What this page does not cover

The cases in which the information before the order applies to professional investors and other rules that apply best execution to derivatives transactions are not covered on this page. How the US rule treats derivatives that are not securities and how the operational provisions of MiFID II and FINRA Rule 5310 apply to derivatives are not covered on this page. Operation within the trading flow of over-the-counter derivatives, such as RFQ (a method in which a participant on a trading platform asks several participants for quotes), is not covered on this page.

Notes

"金融商品取引法" (Financial Instruments and Exchange Act, in Japanese), Article 40-2, paragraph 1. The article defines sales and purchases of securities and derivatives transactions, excluding those "specified by Cabinet Order" in that paragraph, as "securities-related transactions" (有価証券等取引). ↩
"金融商品取引法施行令" (Order for Enforcement of the Financial Instruments and Exchange Act, in Japanese), Article 16-6, paragraph 1, item 1 (sales and purchases of securities, excluding (a) listed share certificates and similar securities, (b) over-the-counter-traded securities, and (c) handled securities) and item 2 (derivatives transactions). Paragraph 3 covers the transactions in paragraph 4. ↩
"金融商品取引業等に関する内閣府令" (Cabinet Office Order on Financial Instruments Business, in Japanese), Article 124, paragraph 1, items 1 to 10. The parenthetical in Article 16-6, paragraph 1, item 1 (a) of the Order for Enforcement excludes transactions that amount to derivatives transactions from sales and purchases of listed share certificates and similar securities. ↩
"金融商品取引法" (Financial Instruments and Exchange Act, in Japanese), Article 45, item 2 and its proviso. ↩
"金融商品取引法" (Financial Instruments and Exchange Act, in Japanese), Article 40-2, paragraphs 1 to 5. In the right column, paragraph 1 is set by Order for Enforcement Article 16-6, paragraph 2 and Cabinet Office Order Article 124, paragraph 2; paragraph 2 by Article 124, paragraph 3; paragraph 4 by Article 124, paragraph 4 and the proviso; and paragraph 5 by Article 124, paragraphs 6 and 8. ↩
"金融商品取引業等に関する内閣府令" (Cabinet Office Order on Financial Instruments Business, in Japanese), Article 124, paragraph 2, items 1 and 2. ↩
"金融商品取引業等に関する内閣府令" (Cabinet Office Order on Financial Instruments Business, in Japanese), Article 124, paragraph 7, items 1 to 5, and paragraph 8. ↩
"金融商品取引法" (Financial Instruments and Exchange Act, in Japanese), Article 208, item 6 (fine), Article 51 (business improvement order), and Article 52, paragraph 1, item 7 (business suspension and others). Whether a breach of paragraph 3 actually leads to these dispositions depends on the authorities' judgment in each case. ↩
Directive 2014/65/EU (text as adopted), Article 27, paragraphs 1, 4, 5, and 8. ↩
FCA Handbook, COBS 11.2A.2R (the duty and the factors to consider), COBS 11.2A.4G (dealing on own account), and COBS 11.2A.7G (types of financial instrument and over-the-counter transactions). The notes to the provisions in COBS 11.2A state that they correspond to Article 27 and other provisions of MiFID. ↩
FINRA Rule 5310, paragraphs (a)(1) and (e), and Supplementary Material .06. ↩
"金融商品取引法施行令" (Order for Enforcement of the Financial Instruments and Exchange Act, in Japanese), Article 16-6, paragraph 1, item 2. ↩
FSA, "金融商品取引業者等向けの総合的な監督指針" (Comprehensive Guidelines for Supervision of Financial Instruments Business Operators, in Japanese; title translated for this page), IV-3-3-3(2) (page 170). Specific consent is set out in Article 123, paragraph 1, item 13 (b) and (c) of the Cabinet Office Order on Financial Instruments Business. ↩
FCA Handbook, COBS 11.2A.7G (guidance) and COBS 11.2A.8R(4) (rule). ↩
FCA Handbook, COBS 11.2A.6G. ↩
Directive 2014/65/EU (text as adopted), Article 27, paragraph 7. FINRA Rule 5310 Supplementary Material .09(a). That the box does not reach derivatives transactions rests on Order for Enforcement Article 16-6, paragraph 1, item 2. ↩
FSA, "金融商品取引業者等向けの総合的な監督指針" (Comprehensive Guidelines for Supervision of Financial Instruments Business Operators, in Japanese; title translated for this page), IV-3-1-2(11) (1) to (4) (pages 135 to 136). The classification in (2) relates to Article 124, paragraph 2, item 2 (b) of the Cabinet Office Order. ↩

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