CSA and IIROC release provisions regarding third-party electronic access to marketplaces

The Canadian Securities Administrators yesterday introduced proposed amendments to NI 23-103 Electronic Trading to impose requirements on participant dealers that provide direct electronic access (DEA). As we've discussed in the past, the CSA adopted NI 23-103, intended to address the risks of electronic trading, specifically with respect to credit risk, market integrity risk, technology or systems risk and regulatory arbitrage risk, earlier this year. However, the instrument, which comes into effect on March 1, 2013, did not include requirements regarding the provision of DEA. The proposals released yesterday are thus intended to address the need for appropriate controls to manage risks associated with providing DEA.

Specifically, the amendments would: (i) limit the registrants that may provide DEA to fully registered dealers, and limit those that may use DEA to portfolio managers and restricted portfolio managers (thereby excluding exempt market dealers); (ii) require dealers to establish, maintain and apply appropriate standards for providing DEA and assess and document whether each client meets the standards; (iii) require that dealers have a written agreement with each DEA client ; (iv) require dealers to determine what training their clients need to understand the marketplace and regulatory requirements; (v) require that dealers assign each DEA client a unique identifier; and (vi) generally only allow a DEA client to trade for its own account.

Meanwhile, the Investment Industry Regulatory Organization of Canada (IIROC) yesterday released proposed amendments to UMIR and its Dealer Member Rules intended to provide a comprehensive framework to regulate third-party electronic access to marketplaces. Specifically, IIROC's proposals would amend UMIR to introduce (i) requirements for participants providing direct electronic access; (ii) provisions regarding participants' routing arrangements with investment dealers; (iii) requirements for supervision of orders entered by an order execution client by a participant that provides order execution services; and (iv) gatekeeper obligations on a marketplace that provides access to a participant or access person and on a participant that provides direct electronic access to clients or investment dealers under routing arrangements.

IIROC's Dealer Member Rules would also be amended to provide an exemption from the suitability obligations under certain circumstances where a dealer accepts an order from a client or transmits an order for a client that has been provided with direct electronic access and that would prohibit dealers that offer order execution only services to retail customers from allowing clients to use automated order systems or allowing clients to manually send orders that exceed thresholds set by IIROC.

IIROC also released draft guidance with respect to IIROC's expectations for supervision of trading when a participant has provided electronic access to marketplaces to third parties and the marketing of orders entered on a marketplace by a person with third-party access.

Comments on all the proposed amendments and draft guidance are being accepted until January 23, 2013. For more information, see IIROC Notices 12-0315 and 12-0316.

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