Summary of Analysis and Conclusions Regarding Quality of Execution Obtained
When executing a transaction for MSD Partners, L.P. (“MSD Partners”) or placing an order with a third party for execution on behalf of MSD Partners, MSD Partners Europe, LLP (“MSD Europe”) must act in the best interests of MSD Partners. In complying with this obligation for the calendar year ending 31 December 2017, MSD Europe was obliged to take all reasonable steps to obtain the best possible result taking account of relevant execution factors.
In placing orders to purchase and sell securities for MSD Partners, MSD Europe considers a number of factors in selecting appropriate counterparties to obtain the most favorable result under the circumstances, considering the full range of services provided, within the current parameters of the market. Best execution is not necessarily measured by the circumstances surrounding a single transaction, but may be measured over time.
In determining whether a particular counterparty is likely to provide best execution for a particular trade, MSD Europe may consider the following factors (understanding that different factors will have different levels of importance with each unique order).
a)Comfort Level with Counterparty (including, but not limited to):
- Market Familiarity/Expertise: trading expertise, including ability to minimize total trading costs and trade without unduly impacting the market, as well as the broker’s knowledge of the market for that particular security.
- Reliability/Responsiveness: history of being able to provide support when placing a difficult trade and/or the attention and consistency of trading personnel, including the willingness of the counterparty to address problems that may arise.
- Integrity/Confidentiality: respecting MSD Europe’s desire to keep certain trading confidential.
- Quality of Executions: technological infrastructure and operational capabilities to execute and settle the trade (i.e., history of accurate and timely executions, lack of errors, etc.).
- Financial Responsibility and Condition: financial condition and creditworthiness, including an assessment of the jurisdiction and bankruptcy laws governing the entity that holds client assets.
b)Transaction Specific Factors (including, but not limited to):
- Best Price: ability to obtain the best overall price and to sell or buy with minimal disruption to the market price.
- Commission/Costs of a Trade: commissions, mark-ups, markdowns or spreads in the context of MSD Europe’s knowledge of negotiated commission rates/transaction costs currently available.
- Market Access/Ability: ability to provide access to liquidity, volume, underwritten offerings, IPOs and secondary markets.
- Financing Terms: quality of the terms required by the counterparty.
- Trade Settlement (settlement risk): ability to ensure securities will be delivered on settlement date.
- High Volume Transaction: ability to handle block orders, block positioning or large program trades.
- Willingness to Commit Capital: willingness to purchase for its own account a thinly-traded issue when there is limited interest in the security.
MSD Europe does not have any close links or common ownership with any of the execution venues or investment firms that execute client orders for MSD Europe.
MSD Europe has established policies and procedures to monitor and resolve conflicts with respect to any execution venues used to execute client orders. MSD Europe does not have any arrangements under which MSD Europe receives any payment, discount, or rebate from an execution venue or investment firm. For the calendar year ending 31 December 2017, MSD Europe had commission sharing agreements that allowed MSD Europe to pool excess commissionsto pay certain brokers for their research and other permitted goods or services. In addition, MSD Europe waspermitted under rules relating to dealing commission to receive non-monetary benefits such as investment research from investment firms to which MSD Europe transmitted client orders. In compliance with its obligation to take all reasonable steps to achieve the best possible result when executing client orders, MSD Europedetermined that such arrangements did not result in any detriment to the quality of execution obtained for its client.
MSD Europe actively assesses the quality of its execution using data and other tools, including IHS Markit’s Transaction Cost Analysis. For example, MSD Europe conducts post-trade transaction cost analysis to analyse trader decision-making and the performance of its execution venues and trading strategies. Among other things, this analysis considers whether an executed price was higher or lower than the price of the financial instrument at the time the order was received from the portfolio manager (i.e., arrival costs) and whether actual arrival costs were consistent with anticipated arrival costs (using internal and/or third party estimates). A formal governance oversight meeting (MSD Partners’ Best Execution Committee) is held on a semi-annual basis in order to review adherence to the best execution policy. It is attended by senior investment, compliance and trading employees who review the information available for all traded instrument types and to discuss any concerns or issues.
MSD Europe considers that the above approach enabled it to achieve a high quality of execution for its client for the calendar year ending 31 December 2017.