Rules for the best execution of a transaction order
These rules for the best execution of a transaction order (hereinafter: ‘Rules’) set forth the principles further to which LHV Bank executes and communicates clients' transaction orders. Where possible, LHV Bank shall execute transactions orders on regulated markets and in multilateral trading systems and, if this is not possible, LHV Bank may communicate transaction orders to a thirdparty intermediary (broker).
When and to what extent do the Rules for the best execution of a transaction order apply?
These Rules apply to all securities mediated by LHV Bank. You will find the selection of securities tradable by LHV Bank's proxy on the website of LHV Bank. Likewise, the Rules apply to the execution and communication of orders related to the management of a security portfolio. The principles laid down in the Rules do not apply to clients classified by LHV Bank as eligible counterparties. If the client gives LHV Bank specific instructions for the execution of a transaction order (for instance, as regards the price of execution), LHV Bank will execute the transaction order further to the client's instructions and this may diverge from the procedure described in the Rules. Where the client’s instructions cover an order only in part, LHV Bank shall endeavour to ensure the best execution of the order as regards its remaining parts. If the client does not give specific instructions to execute an order, LHV Bank shall execute the order as per the Rules.
If the client uses automatic trading systems, LHV Bank will be unable to apply the Rules and the transaction order will be executed further to the specific parameters (including market price, quantity, the other party) specified by the client. For instance, where the client submits an order via the internet bank and it is executed without interference from LHV Bank (i.e., it is automatically and promptly communicated to the stock exchange), the client shall be deemed to have submitted a specific instruction and LHV Bank shall be deemed to have proceeded from the best interests of the client. Read more on the automatic trading system and recommended order types on the website of LHV Bank. However, if the bank interferes in any way with the execution or communication of the order, the best execution rules shall nevertheless apply.
Where the client submits an order and it is executed, for instance, via trading platforms such as LHV Trader and LHV Broker, the order shall be deemed to have been given without interference from LHV Bank, i.e., the client has given a specific instruction and LHV Bank proceeded from the best interests of the client. A similar situation arises where LHV Bank communicates an instruction of the client to the place of execution via a third-party intermediary with whom a relevant agreement has been entered into. In such a case, LHV Bank cannot monitor the execution of each order and the service provider of the relevant trading platform or the thirdparty intermediary proceed from their own current rules for the execution of orders. LHV Bank shall assess and make sure that the best execution rules of service providers and intermediaries provide for equivalent protection of clients’ interests. In extraordinary market conditions, LHV Bank may decide that it is necessary, for the best interests of clients, to use measures to execute or communicate orders that diverge from the measures usually applied to such orders. Such extraordinary market conditions are, for instance, situations where the stock market is extremely fluctuant or where there are external or internal (within LHV Bank) system failures. Disruptions may occur in the information systems of both LHV Bank as well as service providers. Disruptions may occur both in the communication of an order to LHV Bank and in communication with the places of execution. In such an event, LHV Bank will notify the client of any delay in the execution of an order.
Certain securities transactions are performed in such a way that the counterparty to the client may be LHV Bank, a service provider or a third party and the order is not executed on a regulated market (hereinafter: over-the-counter transactions or OTC transactions).
Where LHV Bank or a service provider of LHV Bank offers the client a quotation or negotiates the terms and conditions of an OTC transaction with LHV Bank or a service provider of LHV Bank as a counterparty, then LHV Bank normally does not act on behalf of the client and is not guided by these Rules. LHV Bank performs an OTC transaction upon receipt of an order to this effect.
What parameters does LHV Bank consider in the best execution of orders?
- Market price of the security
- Peculiarities of the financial instrument (see more on the website of LHV Bank)
- Trading hours of markets (see more on the website of LHV Bank)
- Speed of the transaction execution
- Market depth and liquidity
- Likelihood of the transaction or settlement actualisation
- Amount of the transaction order (see section "Sizable orders")
- Transaction execution costs
- Transaction order types (see more on the website of LHV Bank)
- Constraints preset by the client
- client data (including classification into retail client or professional client)
- Impact on the market of the disclosure of the transaction order (see section "Sizable orders")
- Other circumstances impacting on the efficient execution of a transaction order (including the current market conditions)
The above factors have not been listed in any order of significance, since, depending on the peculiarities of instruments, the degree of significance of each factor may vary. LHV Bank takes into account that in the execution of a transaction order there may be factors counteracting one another, and in the best execution of transaction orders LHV Bank allows for the joint effect of these factors. In case of retail clients, the best possible result is ascertained on the basis of the total cost. Total cost consists of the price of the financial instrument and the costs of execution, comprising all costs which have been borne by the client and which are directly related to the execution of the order, e.g. trading venue, clearing and settlement fees and other fees payable to third parties participating in the execution of the order.
LHV Bank forewarns retail clients that other factors of execution, such as the speed of execution, likelihood of execution, speed of settlement, likelihood of settlement, volume of the order and type of the order are less important than the total cost factor. In case of professional clients, the best possible result is ascertained on the basis of the volume of the order and speed of execution.
LHV Bank forewarns professional clients that other factors of execution, such as the total cost, likelihood of execution, speed of settlement, likelihood of settlement, type of the order and other factors are less important than the volume of the order and the speed of execution. Still, LHV Bank will also consider the total cost as an important factor in case of professional clients.
Places of execution and third-party intermediaries
For the best execution of a transaction order, LHV Bank may use the following places:
- regulated markets;
- LHV Bank's partners in regulated markets or multilateral trading systems;
- LHV Pank;
- other elements ensuring liquidity or persons performing such functions.
The list of places of execution and third-party intermediary is provided in Annex 1.
In choosing the place of execution LHV Bank considers the price and the amount of costs connected with execution and, among other things, LHV Bank considers where the execution of a transaction order is likeliest. LHV Bank does not assess the likelihood of execution anew prior to each transaction execution; rather, LHV Bank selects the place of execution for a given transaction on the prior indicators for transactions of a similar type.
On the Riga, Vilnius and Tallinn stock exchanges, and in the multilateral First North and Bloomberg Trading Facility Limited, LHV Bank operates as a member, and on other regulated markets by proxy of its foreign partners who have access to the foreign market where the security specified in the transaction order is traded. If on the list of prospective places of executions there is only one place, LHV Bank deems itself to have provided the best possible execution and that the transaction order will be executed as well as possible in such a case.
Orders related to initial public offerings (IPOs) are accepted and communicated by LHV Bank to the issuer or its representative in accordance with the terms of the IPO.
In choosing a third-party intermediary (e.g., a broker), LHV Bank considers such factors as the price, costs, speed, likelihood of execution and settlement as well as other factors that may be critical at the moment when the order is communicated.
Communication of a transaction order
Orders may be communicated to LHV Bank via the internet bank, in writing or by any other means agreed upon (e.g., by telephone). LHV Bank shall execute all orders of clients accurately, fairly and promptly. If LHV Bank needs to communicate transaction orders to a foreign market through the business partners, LHV Bank will be unable to monitor the execution process directly and, because of that, LHV Bank has, in choosing business partners, considered their reliability, stability and professionalism as well as capability in executing orders in accordance with the best execution rules of LHV Bank.
Time required for the execution of a transaction order
LHV Bank accepts a transaction order communicated by the client for execution at the earliest opportunity after receipt of the order; however, the temporal sequence of receiving orders may depend on the method of communicating the order. In its execution, the specifications related to the securities will be considered, which are available on the website of LHV Bank.
Amalgamation of transaction orders
Sometimes it makes sense, in the interests of best execution, to consolidate the transaction orders of several clients or of clients and LHV Bank into one order. Though LHV Bank consolidates orders only if an adverse effect from a consolidation is unlikely, this may, however, impair the execution of the client's order in some instances. If the execution of a consolidated order is affected only in part, LHV Bank will execute clients' individual orders based on the obtained average price and in proportion to the amount executed, allocating the related transactions first to clients and only then to the bank. Subject to an agreement with the clients, LHV may split a partially executed consolidated order between all the participating clients in a way that diverges from the rules laid down in this procedure.
If the client's transaction order clears a certain threshold, LHV Bank will treat it as a so-called sizable order. The execution of a sizable order may cause unwelcome fluctuations on a market, which will prevent the implementation of the procedure for the best execution, and, because of that, LHV Bank may decide autonomously in what proportions to communicate a transaction order to the market. Sizable orders may diverge based on the type of instrument, place of execution and market conditions. Hence, LHV Bank is unable to specify the amount and execution procedure of a sizable order in the best execution rules.
If the client wishes to place a transaction order for the trading of a financial instrument whose liquidity is low or which is not traded on a regulated market, the client will have to allow for significant price fluctuation and the fact that the best execution rules cannot be honoured. To perform transactions with low-liquidity financial instruments, LHV Bank advises clients to find their own partner and negotiate the price for the transaction with the partner.
Five key places of execution and brokers
The following information will be published on the website of LHV Bank once a year:
- five key places of execution in terms of the trading volume – concerns all client orders that have been executed and is broken down into classes of financial instruments, retail and professional clients;
- for each of the five key places of execution – financing via securities in transactions concerning all client orders that have been executed;
- summaries of analyses and conclusions made on the basis of assessing the quality of the places of execution.
LHV Bank will publish the aforementioned information also for five key brokers.
Monitoring, assessing and modifying the best execution rules for orders
LHV Bank assesses and regularly verifies the efficiency of its best execution rules directly through the units responsible for ensuring the best execution and via compliance checks. To this end, LHV Bank reviews the best execution rules at least once a year and updates them if an essential change is found in the arrangements for the execution of transactions. An essential change may, for instance, be an event that may affect the parameters of best execution such as costs, prices, speed, likelihood of execution and settlement, volume, nature, etc. Updates of the best execution rules are always published on the website of LHV Bank.
Likewise, LHV Bank regularly assesses whether the chosen places of execution and cooperation partners (brokers included) comply with the current criteria and follow the best execution rules.
For more information concerning the execution of orders, please contact the customer service of LHV Bank by e-mailing to firstname.lastname@example.org or calling 6 800 400.
Description of and procedure for averting potential conflicts of interest
What is conflict of interest?
Conflict of interest is a situation that may arise in the performance of a contract or work duty, through an action or failure to act, or by performing various roles simultaneously. In the event of a conflict of interest, the financial interests of one party are in conflict with those of the other, and it is difficult to maintain objectivity.
LHV Bank aims to avoid situations where the interests of a client or LHV Bank are in conflict, and aims to discharge its obligations toward a client in the best possible manner. It is not always possible to avoid such situations; we will provide notice of a possible conflict of interest, giving the client the opportunity to assess its impact on the investment decision.
Preparation of investment analyses and Pro ideas
A possible conflict of interest may arise if the team of analysts or an analyst preparing an investment recommendation or analysis with respect to an issuer may have shares of the same issuer or other such financial interests, which may conflict with the interests of clients. A conflict of interest arising from the preparation of investment analyses is prevented in accordance with the information disclosure requirements specified in legislation and the LHV Bank internal regulations. Additionally, LHV Bank has stipulated restrictions for those preparing analyses in the performance of transactions with the securities analysed.
A possible conflict of interest may arise if a broker executes a transaction between clients whose interests diverge or whose coincidental partner is LHV Bank or an LHV Bank staff member. To prevent a conflict of interest related to securities trading and to protect client interests, stringent requirements and rules on proceeding in the execution of transactions have been prescribed through legislation and LHV Bank internal regulations.
A possible conflict of interest may arise if the company to whom credit is provided, is also provided other services (e.g. investment banking, portfolio management or other services). To hedge the risks, the functions which may face a conflict of interest shall be located in different departments, with the functions themselves served by different employees. The employee remuneration principles shall not be based on the preference of certain client groups.
Investment consulting and portfolio management
A possible conflict of interest may arise if the client is given personal recommendations regarding transactions related to financial instruments, or in case of management of a client's portfolio, where the person recommending the transaction or the portfolio manager has personal interests in the financial instruments. The purpose of investment consulting is to give relevant and objective advice, as well as to introduce options suiting the client's situation and risk profile. It is the client's task to pass the final investment decision. A conflict of interest shall be hedged via the principle of separation of the functions, as well as supervision by the investment committee and the internal control department.
Employee remuneration principles
A possible conflict of interest might arise if the employee remuneration principles rested on the preference of the interests of certain client groups. LHV Bank remunerates its employees with a set monthly salary and performance pay, the latter being tied to performance over a longer period.
Fees for services
A possible conflict of interest might arise if fees are received from or paid to third persons in the course of the provision of investment services. To avoid conflicts related to the preference of the payer or payee of a fee, LHV Bank accepts the receipt or payment of a fee only if this improves the quality of the services provided to the client and does not adversely affect the client's interests.