The Case for a Best Execution Principle in Cross-border Payments

University of Luxembourg Law WPS 2021-002

UNSW Law Research Paper No. 21-45

42 Pages Posted: 4 May 2021 Last revised: 16 Jun 2021

See all articles by Dirk A. Zetzsche

Dirk A. Zetzsche

Universite du Luxembourg - Faculty of Law, Economics and Finance; Heinrich Heine University Dusseldorf - Center for Business & Corporate Law (CBC); European Banking Institute

Ross P. Buckley

University of New South Wales (UNSW) - Faculty of Law

Douglas W. Arner

The University of Hong Kong - Faculty of Law

Maria Lucia Passador

Harvard University - Harvard Law School; Bocconi University - Department of Law; Universite du Luxembourg - Faculty of Law, Economics and Finance

Date Written: April 26, 2021

Abstract

Cross-border payments suffer from a lack of speed and transparency and limited access, resulting in higher overall costs than domestic payments. This paper analyses how the best execution principle developed in the context of securities and derivatives could be applied to cross-border payments. Under that principle, financial institutions are legally required to provide the most advantageous order execution in terms of speed, risks and costs for their customers given the prevailing market environment.

We argue that introducing best execution could alter the current set-up of cross-border payments which rests, for the most part, on a system of large, globally connected correspondent banks. The current system is best understood as one of “best friends”, in that the relationship among payment institutions determines through which institutions orders are routed. In turn, payment institutions charge their clients on a “cost plus profit” basis. Some of the payment institutions even benefit from rebates based on liquidity volume (kick-backs) and from reduced rates and soft commissions elsewhere in the payment chain. Overall, there is little incentive for payment institutions to truly put their clients first in terms of speed, costs and risks in the current “best friends” environment. Introducing “best execution” is potentially a game changer: it would require payment institutions to focus on their clients’ interests (i.e., when choosing the route the order is to take).

Based on experience with the best execution principle enshrined in securities law, we would expect the large-scale introduction of digital routing systems to identify the offer that constitutes best execution. Furthermore, we expect that more links between correspondent banks, new service providers from the FinTech space, and public payment networks (including regional integration systems) would be established and would assist in identifying excess liquidity in infrequently traded currency pairs. While none of this requires distributed ledger technology, strictu sensu, one convenient way, technically, to achieve that purpose is by implementing a distributed ledger that functions, initially, as a digital liquidity marketplace (a pure information sharing device) and, which in time, could be further developed into a “best execution platform”.

Keywords: Cross-border payments, best execution, payments, correspondent bank, closed-loop systems, competition, multilateral systems, artificial intelligence, distributed ledger, blockchain.

JEL Classification: G21, G23, K22, K23.

Suggested Citation

Zetzsche, Dirk Andreas and Buckley, Ross P. and Arner, Douglas W. and Passador, Maria Lucia, The Case for a Best Execution Principle in Cross-border Payments (April 26, 2021). University of Luxembourg Law WPS 2021-002, UNSW Law Research Paper No. 21-45, Available at SSRN: https://ssrn.com/abstract=3834335 or http://dx.doi.org/10.2139/ssrn.3834335

Dirk Andreas Zetzsche (Contact Author)

Universite du Luxembourg - Faculty of Law, Economics and Finance ( email )

Luxembourg, L-1511
Luxembourg

HOME PAGE: http://wwwen.uni.lu/recherche/fdef/research_unit_in_law/equipe/dirk_andreas_zetzsche

Heinrich Heine University Dusseldorf - Center for Business & Corporate Law (CBC) ( email )

Universitaetsstr. 1
D-40225 Düsseldorf
Germany
+49 211 81 15084 (Phone)
+49 211 81 11427 (Fax)

European Banking Institute ( email )

Frankfurt
Germany

Ross P. Buckley

University of New South Wales (UNSW) - Faculty of Law ( email )

Sydney, New South Wales 2052
Australia

Douglas W. Arner

The University of Hong Kong - Faculty of Law ( email )

Pokfulam Road
Hong Kong, Hong Kong
China

HOME PAGE: http://hub.hku.hk/rp/rp01237

Maria Lucia Passador

Harvard University - Harvard Law School ( email )

1563 Massachusetts Avenue
Cambridge, MA 02138
United States

Bocconi University - Department of Law ( email )

Via Roentgen, 1
Milan, Milan 20136
Italy

Universite du Luxembourg - Faculty of Law, Economics and Finance ( email )

4, rue Alphonse Weicker - C221A
Luxembourg, L-2721
Luxembourg

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