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Posted on July 30, 2010
On Tuesday, the U.S. Securities and Exchange Commission (SEC) published a request for public comment for a study to evaluate
the effectiveness of existing legal or regulatory standards of care for brokers, dealers, investment advisers, and persons associated with them when providing personalized investment advice and recommendations about securities to retail investors; and whether there are gaps, shortcomings, or overlaps in legal or regulatory standards in the protection of retail customers relating to the standards of care for these intermediaries.
Such a study is required by s. 913 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law by President Obama last week. In Canada, most provinces and territories adopted a fiduciary standard for registrants as part of the broad registration reforms implemented last September.
Posted on July 30, 2010
The Canadian Foundation for Advancement of Investor Rights (FAIR Canada) released a report earlier this week that reviews "the conflicts of interest that arise when exchanges that are commercial businesses also act as regulators and supervisors of issuers." Specifically, the report contends that the TSX is the only major exchange reviewed that has failed to implement specific measures to manage its conflicts of interest in regulating listed companies. According to FAIR Canada, other major exchanges have addressed such conflicts through changes in corporate governance, organizational structure, corporate policies and internal procedures.
Ultimately, the report provides three regulatory alternatives for the TSX to consider, being: (i) transferring most listings regulation responsibilities to another regulator; (ii) establishing a regulation subsidiary company with independent governance to perform listing regulation; and (iii) establishing a listings regulation department that is separate from the business operations of the exchange to perform listings regulation. While an Ontario legislative committee recently recommended that the OSC review the potential for conflicts of interest between the regulatory and commercial functions of the TSX, it is not yet clear whether any regulatory changes will be made.
Posted on July 30, 2010
As we previously discussed, the New Brunswick Securities Commission recently proposed an amendment to its Local Rule 91-501 Derivatives to modify the language respecting the exemption for "qualified parties". Specifically, the amendment states that the registration requirement does not apply "where each party to the trade is a qualified party acting as principal". The NBSC has now set the date of implementation of the amendment as September 1, 2010.
Posted on July 23, 2010
The Ontario Securities Commission (OSC) today published a revised version of OSC Staff Notice 21-703 - Transparency of the Operations of Stock Exchanges and Alternative Trading Systems. Staff Notice 21-703 sets out the process of OSC Staff for reviewing changes to certain operations of exchanges and alternative trading systems. The Notice has been revised in order to apply to the notice and filing process relating to the initial operations of an ATS seeking to carry on business in Ontario.
Posted on July 22, 2010
Yesterday, the Securities and Exchange Commission (SEC) approved changes to Form ADV, the principal disclosure document that registered investment advisers are required to provide to clients. According to SEC Chairman Mary Schapiro, the current form's check-the-box formal "frequently does not correspond well to an adviser's business." As such, the changes are intended to improve the information available to clients regarding those providing them with investment advice. To that end, the format of the brochure will be updated to including narrative in plain English, the content will be expanded to include topics such as fees and compensation, an adviser's disciplinary information and brokerage practices and advisers will be required to deliver brochure supplements that contain "résumé-like disclosure" regarding such things as educational background and business experience. Advisers will also be required to electronically file brochures, which will be available to the public on the SEC's website.
The amendments will be effective 60 days after publication in the Federal Register and the SEC expects that investment advisers will begin distributing and posting new brochures in the first quarter of 2011.
Posted on July 22, 2010
The Securities and Exchange Commission (SEC) yesterday announced proposals intended to improve the regulation of mutual fund distribution fees and provide enhanced disclosure for investors. Distribution fees, also known as 12b-1 fees, are fees paid by the fund out of its assets to cover distribution costs and shareholder service expenses. The proposals would limit fund sales charges, improve the transparency of fees by requiring funds to identify and more clearly disclose distribution fees, encourage retail price competition and revise fund director oversight duties. The proposals will be open to a 90-day comment period after publication in the Federal Register.
Posted on July 20, 2010
On July 16, Alpha ATS announced plans to offer new order types through its Alpha IntraSpread facility, specifically dark orders and "seek dark liquidity" (SDL) orders. Dark orders are fully hidden and provide no pre-trade transparency, while SDL orders are used to interact with the dark liquidity of the same subscriber. Alpha ATS is accepting comments on its proposals until August 16, 2010 and it stated that if no regulatory concerns are raised, it may implement the changes by August 30, 2010.
Posted on July 16, 2010
On July 15, the U.S. Senate passed the Dodd-Frank Wall Street Reform and Consumer Protection Act by a vote of 60-39. The legislation is intended to overhaul the financial regulatory system in the U.S. by improving the supervision and regulation of federal depository institutions, providing transparency to derivatives markets and setting out obligations regarding corporate governance and executive compensation.
The legislation, which was passed by House of Representatives on June 30, is now awaiting the President's signature. A brief summary of the legislation is provided by the House Financial Services Committee, while Steven M. Davidoff provides some thoughts in the New York Times' DealBook.
Posted on July 16, 2010
The Canadian Securities Administrators today published for comment a proposed rule, policies and related consequential amendments that would impose regulatory oversight for designated credit rating agencies and organizations. Under the proposals, credit rating organizations wishing to become designated for the purposes of having their credit ratings eligible for use where credit ratings are referred to in securities legislation would have to apply and, once designated, maintain and ensure compliance with a code of conduct that complies with the provisions of the IOSCO Code of Conduct Fundamentals for Credit Ratings Agencies of the International Organization of Securities Commissions. The IOSCO Code addresses such issues as: (i) the quality and integrity of the rating process; (ii) credit rating agency independence and the avoidance of conflicts of interest; (iii) credit rating agency responsibilities to the investing public and issuers; and (iv) disclosure of the code of conduct and communication with market participants. Deviations, however, from the provisions of the IOSCO Code would be permitted under certain circumstances.
Comments are being accepted by the CSA until October 25, 2010.
Notice and Request for Comment - Proposed National Instrument 25-101 Designated Rating Organizations, Related Policies and Consequential Amendments.
Posted on July 15, 2010
The Securities and Exchange Commission yesterday announced that it was issuing a concept release to seek public comment on the U.S. proxy system. Specifically, the comprehensive review focuses on the accuracy, transparency and efficiency of the voting process, communications and shareholder participation and the relationship between voting power and economic interest. The SEC is accepting public comment for a 90-day period.
Posted on July 14, 2010
The U.S. Financial Industry Regulatory Authority (FINRA) yesterday announced an expansion in the amount of information that will be available to the public regarding current and former security brokers through its online BrokerCheck service. Specifically, the changes will increase the number of customer complaints that are reported publicly by disclosing historic complaints back to 1999, expand the disclosure period for former brokers from two years to ten years, make certain information regarding former brokers permanently available and formalize the process for brokers to dispute the accuracy of the information. The expansion of BrokerCheck is expected to be complete by the end of the year.
Posted on July 13, 2010
The Canadian Securities Transition Office today announced the release of its Transition Plan for the Canadian Securities Regulatory Authority. The Transition Plan provides a roadmap for establishing the CSRA and sets out a vision for the Authority's regulatory approach. Issues considered by the Transition Plan include governance, organization design, business processes and implementation planning.
According to the Transition Office, the next step in the transition will involve the signing of development agreements between the participating provinces and territories and the federal government by September 2010. Under the development agreements, the provinces and territories would assign regulatory and ministry staff to share expertise in establishing the CSRA. Work under the development agreements would be followed by memoranda of understanding between the participating provinces and territories and the federal government to address various matters of interest. These MOUs would be concluded by July 1, 2011. A launch date for the CSRA, meanwhile, has been established as July 1, 2012.
For more information on the move towards a national securities regulator, see our post of June 8, 2010.
Posted on July 12, 2010
On June 30, an amendment to Quebec's Derivatives Regulation came into force, which states that Regulation 23-102, which adopts National Instrument 23-102 Use of Client Brokerage Commissions in the province, applies to dealers and advisers governed by the Derivatives Act.
Posted on July 9, 2010
Mihkel E. Voore and Ramandeep Grewal
As we discussed in our post of April 9, the Canadian Securities Administrators (CSA) have recently published much-anticipated proposals to amend National Instrument 54-101 Communication with Beneficial Owners of Securities of a Reporting Issuer (NI 54-101), which would give issuers the option to post proxy-related materials on a non-SEDAR website under a “notice-and-access” model. The proposed amendments aim not only to facilitate communication with shareholders, but also include amendments intended to increase the overall efficiency and equity among key players involved in the securityholder communication process.
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Posted on July 6, 2010
As we discussed in our post of September 18, 2009, the U.S. Securities and Exchange Commission published a proposal last year to eliminate the exception under Rule 602 of Regulation NMS under the Securities Exchange Act of 1934 for the use of flash orders by equity and options exchanges.
On July 2, the SEC reopened the comment period on the proposal for 30 additional days.
Posted on July 6, 2010
On July 2, the Investment Industry Regulatory Organization of Canada (IIROC) published Notice 10-0191 relating to securities trading halts in coordination with the application of 'circuit breakers' on U.S. markets. In the U.S., trading halts occur based on trigger levels of 10%, 20% and 30% drops of the Dow Jones Industrial Average, calculated at the beginning of each quarter using the previous month's average closing value. The NYSE thresholds have been announced for the third quarter of 2010 as 1,000 points, 2,050 points and 3,050 points respectively.
It is IIROC's policy that it will coordinate trading halts with U.S. markets, but for days when Canadian markets are open and American markets are closed, IIROC has published related triggers based on drops in the S&P/TSX Composite Index. The TSX trigger levels are: Level 1 (10%) - 1,150 points; Level 2 (20%) - 2,350 points and Level 3 (30%) - 3,500 points, with the effects of the triggers depending on the time of day the threshold drop occurs. Triggering the Level 1 threshold between 2:00 and 2:30 p.m. results in a 30 minute halt in trading, while trading would be shut down for the rest of the day should a Level 3 halt occur.
Posted on June 30, 2010
As we discussed in October 2009, National Instrument 23-102 Use of Client Brokerage Commissions, which seeks to regulate soft dollar arrangements across Canada, stipulating the types of goods and services that may be acquired with client brokerage commissions and prescribing related disclosure requirements, comes into force today.
Further, amendments to Form 81-101F2 Contents of Annual Information Form and Form 41-101F2 Information Required in an Investment Fund Prospectus, intended to ensure consistency between disclosure requirements for advisers under NI 23-102 and similar disclosure prescribed for investment funds are also effective today.
Posted on June 29, 2010
The New Brunswick Securities Commission (NBSC), which in April proposed a clarification to the registration exemption in respect of trades in derivatives for qualified parties, has now stated that, subject to Ministerial approval, the proposed amendments will come into force on September 1, 2010.
Posted on June 25, 2010
The Canadian Securities Administrators (CSA) today published proposed amendments to National Instrument 81-102 Mutual Funds, National Instrument 81-106 Investment Fund Continuous Disclosure and related consequential amendments. The amendments would codify exemptive relief that is frequently granted to mutual funds and other investment funds and is intended to replace a patchwork of exemptive relief orders with uniform requirements. The proposed amendments seek to address the following: exchange-traded mutual funds, investments in other mutual funds, short selling, derivatives, money market funds, mutual fund dealers, mutual fund ratings and continuous disclosure requirements.
Today's amendments are described by the CSA as representing the first phase in modernizing the regulation of conventional mutual funds and other investment funds. The second phase of the project will consider "whether there are any market efficiency, fairness or investor protection issues that arise out of the differing regulatory regimes" applying to different types of investment funds and other competing investment products. The CSA will then consider whether NI 81-102 should be further amended to address such issues.
Posted on June 25, 2010
The CSA today published CSA Staff Notice 23-309 - Frequently Asked Questions about the Order Protection Rule and Intentionally Locked or Crossed Markets - Part 6 of National Instrument 23-101 and Related Companion Policy. The FAQ generally deals with key issues and questions respecting compliance with order protection rule requirements, systems issues requirements and the prohibition against intentionally locking or crossing markets.
Effective February 1, 2011, the order protection rule requires marketplaces and marketplace participants that send directed-action orders to establish, maintain and ensure compliance with written policies and procedures that are reasonably designed to prevent trade-throughs. The prohibition under Part 6 of National Instrument 23-101 Trading Rules from intentionally locking or crossing markets is currently in force.
Posted on June 25, 2010
On June 16, the Alberta Securities Commission and the U.S. Commodity Futures Trading Commission (CFTC) announced the signing of a Memorandum of Understanding intended to enhance the cooperation between the two regulators in connection with their functions relating to the supervision of covered clearing organizations. The MOU was executed on June 10.
Posted on June 24, 2010
On June 11, the U.S. Commodity Futures Trading Commission (CFTC) announced that it was proposing a rule that would require that co-location and proximity hosting services be available to all qualified market participants willing to pay for the services. Comments on the proposals are being accepted until July 12, 2010.
Posted on June 22, 2010
Nunavut has joined most other Canadian provinces and territories in adopting securities transfer legislation. The Securities Transfer Act (Nunavut) was given Royal Assent on June 10.
Posted on June 18, 2010
The Canadian Securities Administrators (CSA) today published CSA Staff Notice 45-307 Regulatory Developments Regarding Securitization. The Notice follows work completed by the CSA subsequent to the publication of its consultation paper on ABCP in October 2008, and states that the CSA's focus "has broadened to encompass all securitized products". The CSA are also considering international regulatory developments in developing their proposals, including recent IOSCO and SEC reports and recommendations.
According to the Notice, the CSA are specifically contemplating changes to the current approach to the issuance of securitized products in the exempt market, enhancements to the disclosure requirements for securitized products distributed by prospectus and changes to continuous disclosure for reporting issuers that have distributed securitized products.
The CSA expect to publish their securitization proposals in the fall, while proposals relating to the regulation of credit rating organizations are expected this summer.
Posted on June 18, 2010
The Ontario Minister of Finance has now approved the amendments to National Instrument 24-101 Institutional Trade Matching and Settlements, which were published on April 16 and are scheduled to come into force on July 1, 2010. A consolidation of the instrument is available here.
Posted on June 18, 2010
The U.S. Securities and Exchange Commission (SEC) announced yesterday proposed amendments to the Financial Industry Regulatory Authority rules respecting clearly erroneous transactions in exchange-listed securities. Under the current rules, a trade may be found to be clearly erroneous where the price of a transaction deviates from the consolidated last sale price for the security beyond a specified amount. These thresholds depend on the consolidated last sale price of the security and whether trading occurs during or outside normal market hours. For example, where the price of a security is up to $25, a deviation of 10% or more during normal market hours would be considered clearly erroneous.
The amendments would, among other things, establish different thresholds and standards to handle large-scale market events and would remove FINRA's flexibility to use different thresholds in unusual circumstances. In circumstances of a multi-stock event involving 20 or more securities, FINRA may use a reference price other than the consolidated last sale and will nullify transactions at prices equal to, or greater than, 30% of the reference price.
The amendments are a further response to the market volatility that occurred on May 6 and follow the recent approval of stock-by-stock circuit breakers in the U.S. We originally discussed the circuit breaker proposals in our post of May 19.
Posted on June 8, 2010
On May 26, 2010, the federal Department of Finance released its proposed Canadian Securities Act (the Act). The Act builds upon the Report released last year by the Expert Panel on Securities Regulation and represents the federal government’s proposal for a harmonized national regime to govern capital markets. Following decades of deliberation by various panels and committees, publication of the proposed Act by the Canadian Securities Transition Office evidences this government’s strong commitment to the establishment of a national securities regime and regulator.
The case for regulation of capital markets at a national level is set out in the preamble to the Act. Among other things, the preamble highlights the need to be competitive and consistent, enhance the integrity and stability of the Canadian financial system, have a comprehensive and coordinated enforcement regime and promote Canada’s interests at a national and international level. While the intent is to create a harmonized federal scheme for securities regulation, provincial participation is voluntary and the Act will only apply to those jurisdictions that choose to take part in the federal scheme. As we discussed previously, the draft Act is only a proposal at this stage, and has been referred to the Supreme Court of Canada for a ruling as to its constitutionality.
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Posted on June 7, 2010
In our post of May 19, we discussed the recent SEC proposals that would see a five minute pause to trading in individual stocks that experienced a 10 percent change in price over a five minute period. On June 4, the SEC issued a statement stating that staff is reviewing comments received and that staff expects to present proposals this week.
Posted on June 4, 2010
The Investment Industry Regulatory Organization of Canada (IIROC) today published proposed amendments to its Dealer Member Rules that would address the fairness of pricing and transparency of OTC market transactions. Initial proposals on the subject were previously published for comment in April 2009 and IIROC has revised its proposals in light of comments received.
Specifically, IIROC's proposals would: (i) require dealers to fairly and reasonably price securities traded in OTC markets, with an exception for primary market transactions and OTC derivatives set out in the rule; (ii) require dealers to disclose yield to maturity on trade confirmations for fixed-income securities and notations for callable and variable rate securities; and (iii) require dealers to include on trade confirmations sent to retail clients in respect of OTC transactions a statement indicating that they have earned remuneration on those transactions unless the amount of any mark-up or mark-down, commissions and other service charges is disclosed on the confirmation. A draft guidance note, describing the scope of the proposed rule, fair pricing considerations and documentation requirements, has also been published by IIROC.
The proposals are open for a 30-day comment period.
Posted on June 2, 2010
On May 26, Alpha Group announced that a new trading fee structure would be coming into effect as of June 1, 2010 subject to regulatory approval. According to Alpha, the new fee reduction "positions Alpha as the market with the lowest active fees" in securities valued greater or equal to $1 and less than $5.
Posted on May 31, 2010
Citing the lack of a central database containing comprehensive and readily accessible data regarding orders and executions, the U.S. Securities and Exchange Commission proposed a new rule on May 26 that would require SROs to establish a consolidated audit trail system. Under the new system, exchanges and FINRA, as well as their members, would be required to provide certain information to the central repository regarding each quote and order in a National Market System (NMS) security.
Such a consolidated system would be intended to: (i) provide regulators direct and timely access to uniform consolidated order and execution information for all orders in NMS securities from all participants across all markets; (ii) enable SROs to better fulfill their regulatory responsibilities to oversee their markets and members; and (iii) enable the SEC to better carry out its oversight of the NMS for securities.
The SEC is accepting public comments on the proposal for 60 days after its publication in the Federal Register.
Posted on May 28, 2010
The Canadian Securities Administrators (CSA) and the Investment Industry Regulatory Organization of Canada (IIROC) today provided an update on their review of market structure issues such as dark pools. The update provides an overview of the views expressed at a consultation forum recently held by the two organizations to discuss Consultation Paper 23-404 Dark Pools, Dark Orders, and Other Developments in Market Structure in Canada. Some of the themes that emerged during the forum included the practice of broker preferencing at the marketplace level and internalization of order flow, the practice of dark pools sending Indications of Interest to attract order flow and the use of market pegged orders. The notice also provides a summary of comments received with respect to the Consultation Paper and states that the CSA and IIROC continue to consider market structure issues and welcome further comments.
Posted on May 28, 2010
On May 25, the Committee of European Securities Regulators (CESR) released a statement describing the "intensifying close co-ordination of its members' market surveillance efforts" in light of recent market volatility in euro denominated debt instruments. The CESR also stated that it is of the view that structural reforms should be "rapidly introduced to enhance the transparency, organisation and functioning" of the bond and CDS markets, which are currently largely over-the-counter. According to the CESR, it is also working on measures to enhance the "organisation and integrity of OTC derivatives markets".
Posted on May 21, 2010
CDS Clearing and Depository Services (CDS) has proposed amendments to its procedures to allow qualified CDS participants to issue and maintain security positions in CDSX in an uncertificated format. According to CDS, the amendments would provide "another option for issuers to issue their securities and is a further step supporting the Canadian capital markets' move towards a dematerialized environment." CDS is accepting comments on its proposed amendments for the next 30 calendar days.
Posted on May 19, 2010
The Globe and Mail, among other media outlets, is reporting today that Germany has banned naked short selling of euro-denominated government bonds, credit default swaps based on the bonds and shares of the country's ten most important financial institutions. The ban, which apparently took effect at midnight, will run until March 31, 2011. According to Reuters, the move caught Germany's European Union colleagues off guard and elicited a particularly strong response from the French Finance Minister, who stated that France would not introduce a similar ban. Whether other EU countries follow suit, however, remains to be seen.
Posted on May 19, 2010
As we discussed yesterday, recent media reports suggested that the U.S. Securities and Exchange Commission (SEC) was planning to announce proposals for new circuit breaker rules to address issues stemming from the market volatility of May 6. Such proposals were subsequently announced late yesterday afternoon.
Under the proposed rules, which reflect a consensus among the various U.S. stock exchanges and the Financial Industry Regulatory Authority (FINRA), trading in a stock would be paused for five minutes where the stock experienced a 10 percent change in price over a five minute period. The five minute pause would be intended to "give the markets the opportunity to attract new trading interest in an affected stock, establish a reasonable market price and resume trading in a fair and orderly fashion." If approved by the SEC after the comment period, the new rules would be in effect on a pilot basis through December 10, 2010, during which time SEC staff would study, among other things, the impact of other trading protocols.
The SEC and Commodity Futures Trading Commission (CFTC) also released their preliminary findings yesterday regarding the "unusual market events" of May 6. While the events of that day continue to be reviewed, the report focuses on the following "hypotheses and findings": (i) the possible linkage between the decline in the prices of stock index products and the simultaneous and subsequent waves of selling in individual securities; (ii) a generalized severe mismatch in liquidity; (iii) the extent to which the liquidity mismatch may have been exacerbated by disparate trading conventions among various exchanges; (iv) the need to examine the use of "stub quotes"; (v) the use of market orders, stop loss market orders and stop loss limit orders that, coupled with sharp price declines, might have contributed to market instability; and (vi) the impact on Exchange Traded Funds.
Posted on May 19, 2010
Nova Scotia's Bill 33, the Securities Transfer Act, received Royal Assent on May 11. According to Minister of Service Nova Scotia and Municipal Relations Ramona Jennex, the legislation "brings greater legal certainties around the holding, transferring and pledging of securities." Nova Scotia now joins most other provinces, which have previously adopted similar legislation.
Posted on May 18, 2010
The Globe and Mail is reporting today that new circuit breaker rules will soon be introduced by the U.S. Securities and Exchange Commission in an attempt to prevent the type of market volatility seen on May 6th. According to the Globe, the circuit breakers may be operational as early as June 14.
Posted on May 18, 2010
Last Friday, the Canadian Securities Administrators (CSA) announced that it was conducting, along with the Investment Industry Regulatory Organization of Canada (IIROC), a "comprehensive analysis" of the events of May 6th with respect to market volatility in the U.S. and Canada. Specifically, the CSA and IIROC state that they will engage in "active dialogue" with other regulators, marketplaces and market participants to consider market volatility issues. Further, they intend to examine electronic trading issues and the appropriateness of the existing circuit breaker policies. For more information on the response of regulators to the events of earlier this month, see our post of May 11.
Posted on May 14, 2010
CDS Clearing and Depository Services (CDS) announced the proposed termination of the Euroclear UK Direct Service last week to reduce operating costs and avoid the projected costs of an anti-money laundering compliance program. CDS also proposed making changes to the form used for participants applying to act as an ISIN activator, security validator or custodian of CDSX eligible securities. The form changes would limit the application to domestic custodians and remove the requirement for Board approval of such applications.
Comments on the proposed amendments are being accepted for 30 calendar days for today's publication in the OSC Bulletin.
Posted on May 13, 2010
The Committee on Payment and Settlement Systems (CPSS) and the Technical Committee of the International Organization of Securities Commissions (IOSCO) released two reports yesterday regarding OTC derivatives. The first, Guidance on the application of the 2004 CPSS-IOSCO Recommendations for Central Counterparties to OTC derivatives CCPs, provides guidance to central counterparties clearing OTC derivatives in applying the Technical Committee's 2004 recommendations. Considerations for trade repositories in OTC derivatives markets, meanwhile, provides a set of considerations for trade repositories in OTC derivatives markets and relevant authorities.
Posted on May 12, 2010
The Technical Committee of the International Organization of Securities Commissions (IOSCO) recently released a consultation report addressing recent regulatory initiatives that impact credit rating agencies. Specifically, the report is intended to evaluate whether, and if so how, international initiatives implement the four IOSCO principles regarding credit rating agencies, being: (i) quality and integrity in the rating process; (ii) independence and conflicts of interest; (iii) transparency and timeliness of ratings disclosure; and (iv) confidential information.
IOSCO is accepting public comments on the report until August 6, 2010.
Posted on May 11, 2010
As regulators continue to investigate last Thursday's extreme market volatility, the Investment Industry Regulatory Organization of Canada (IIROC) has announced that it has re-priced or cancelled various trades occurring during the market slide. Various U.S. markets have also announced that they would cancel trades (see for example announcements from NYSE Arca and NASDAQ). Meanwhile, the Securities and Exchange Commission (SEC) announced yesterday that it has met with the leaders of the Financial Industry Regulatory Authority, NASDAQ, BATS, Direct Edge, ISE and the CBOE, and that all parties have agreed on a structural framework for strengthening circuit breakers and handling erroneous trades.
Today, the SEC and Commodity Futures Trading Commission announced the formation of a joint committee to address "emerging regulatory issues", with the first item on the committee's agenda being a review of last Thursday's market events. Meanwhile, SEC Chairman Mary Schapiro testified before the Financial Services Committee's Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises this afternoon to summarize the events of May 6, provide an overview of the current market structure and discuss various regulatory tools to be considered "in determining how best to maintain fair and orderly financial markets and to prevent severe market disruptions in the future."
Posted on May 11, 2010
On May 7, the U.S. Commodity Futures Trading Commission (CFTC) issued an Advisory to alert market participants regarding their "ongoing legal obligations to comply with speculative position limits." Specifically, the CFTC reaffirmed that such limits apply on an intraday as well as an end-of-day basis and that traders whose positions exceed the applicable speculative position limit "at any time during the day" (emphasis in text) are in violation of the pertinent regulations even if their positions are reduced below the limit by the end of the day.
Posted on May 10, 2010
On May 3, TMX Group Inc., released a letter written to the Canadian Securities Administrators (CSA) outlining its position on the regulation of short sales in Canada in light of recent U.S. amendments on the subject.
Specifically, TMX recommended against adopting SEC-style amendments incorporating a price test trigger and stated that the "additional regulation of short sales in Canada is not warranted." In support of its views, TMX outlined findings from an analysis it performed on securities inter-listed on the TSX and a U.S. exchange. TMX found that on average, at least one inter-listed security would have triggered the SEC-style short sale circuit breaker every day. According to TMX, however, "it is highly unlikely that manipulative shorting occurs every day in one of the inter-listed securities." Thus, TMX urged the CSA "to take a decision on short sales that is contrary to the SEC's politically driven amendment to Reg SHO". Citing UMIR amendments to address failed trades and the strong real-time surveillance and enforcement capabilities of IIROC, TMX further outlined its support for "the removal of the short sale price test for all exchange-listed securities in order for Canadian participants to operate under one rule."
Posted on May 7, 2010
Finance Minister Jim Flaherty is reportedly days away from seeing the completion of draft legislation to create a national securities regulator. According to press reports, Ottawa is planning to send the draft bill to lawmakers and the Supreme Court for a reference on its constitutionality within a few weeks.
Posted on May 7, 2010
CDS Clearing and Depository Services announced proposed amendments to its rules this week to enable the implementation of TRAX, a web application to facilitate communications between transfer agents and participants, as well as to introduce a soft cap and related monitoring mechanism for the net payment obligations of the New York Link service. Both sets of proposals are open for public comment for 30 calendar days from their publication in the OSC Bulletin today.
Posted on April 30, 2010
The Investment Industry Regulatory Organization of Canada (IIROC) published a notice on April 28 providing guidance related to UMIR obligations to mark orders to purchase or sell securities for insiders or significant shareholders. The notice anticipates the upcoming implementation on April 30 of the new insider reporting regime and provides answers to frequently asked questions regarding the UMIR obligations. Questions considered include, among others: (i) whether every order for an insider of a particular security must contain a marker; (ii) when a participant can rely on "know your client" information to establish whether a marker is required; and (iii) whether a marked order can be bundled together with orders for those that are not reporting insiders.
Posted on April 23, 2010
The Investment Industry Regulatory Organization of Canada (IIROC) today published proposed amendments to UMIR respecting market maker, odd lot and other marketplace trading obligations. Specifically, the proposals would replace the definition of "Market Maker Obligations" with a definition of "Marketplace Trading Obligations" in order to provide marketplaces with more flexibility in structuring their market making systems.
Market maker obligations are obligations imposed by the rules of a recognized exchange or recognized quotation and trade reporting system (QTRS) on a person to guarantee (i) a two-sided market for a particular security on a continuous or reasonably continuous basis; and (ii) the execution of orders for the purchase or sale of a particular security which are less than a minimum number of units of the security as designated by the marketplace. The new definition, however, would allow exchanges and QTRSs to structure their market maker systems to provide one or both of the above functions and allow marketplaces to provide for an odd-lot arrangement by contract. The proposed amendments would also make consequential amendments to conform the language used in various UMIR provisions to the new definition.
Comments on the proposals are being accepted by IIROC until June 24, 2010.
Posted on April 23, 2010
It was reported yesterday that Canadian Finance Minister Jim Flaherty, speaking at a financial conference in Toronto on Wednesday, stated that a bill to create a national securities regulator will be ready in a month. According to the Minister, however, the bill will be referred to the Supreme Court of Canada for an opinion on its constitutionality before it is tabled in Parliament. As we discussed in March, the federal government's Budget 2010 set out a three-year target for the establishment of a federal securities regulator.
Posted on April 23, 2010
Alpha ATS announced yesterday that it is seeking regulatory approval from the Ontario Securities Commission (OSC) to become a recognized exchange. According to Alpha, seeking exchange status is the "logical next step" and will allow it to expand into the listing business. Alpha currently generates revenue from trading fees and market data services.
Posted on April 23, 2010
The Investment Industry Regulatory Organization of Canada (IIROC) recently released its Strategic Plan for 2010-2012. The plan describes IIROC's vision and values and sets out the challenges it faces in fulfilling its mandate. Specifically, the plan discusses the following goals:
- Promoting a culture of compliance and high standards among those subject to IIROC's jurisdiction. This will include a reorganization of IIROC's rules to enhance comprehension, providing compliance examination findings and recommendations to members and undertaking periodic industry-wide compliance audits.
- Delivering effective, efficient and expert regulation. Projects that IIROC will undertake in pursuit of this goal include the implementation of a risk-based methodology for registration and completing its framework approach to IFRS.
- Maintaining market integrity by actively monitoring market structure developments and market-related events. IIROC states that it will reduce timelines to complete enforcement investigations and bring proceedings, clarify roles and relationships in order to strengthen the client/adviser relationship and continue to develop its policies respecting OTC and debt markets.
- Ensuring that it discharges its responsibilities in a cost-effective manner, which will include the implementation of an equitable Dealer and Marketplace Member fee model.
- Maintaining a confident and well-trained staff.
Posted on April 22, 2010
The Mutual Fund Dealers Association of Canada (MFDA) recently published a Leverage Supervision Guide to assist its members in meeting their suitability requirements pursuant to MFDA Rule 2.2.1(c).
Pursuant to MFDA Rule 2.2.1(c), MFDA members and approved persons must use due diligence to "ensure that each order accepted or recommendation made for any account of a client is suitable for the client and in keeping with the client's investment objectives". Suitability guidelines were released in April 2008 by the MFDA and the recently-published Guide is intended to provide further guidance and recommended best practices on developing leverage policies and procedures, analyzing practices, maintaining appropriate documentation and supervision of leverage recommendations.
On April 6, meanwhile, the MFDA published revised leverage risk disclosure, which its members must start providing to clients as of July 1.
Posted on April 21, 2010
The U.S. Financial Industry Regulatory Authority (FINRA) yesterday published guidance regarding the suitability, disclosure and other obligations of broker-dealers recommending securities in offerings made under the SEC's Regulation D (private placements). While Regulation D provides exemptions from the registration requirements of the Securities Act of 1933, FINRA's notice stresses that broker-dealers must still conduct a reasonable investigation of the issuer and the securities being recommended and comply with other applicable requirements, including suitability and advertising and supervisory rules. Specifically, the notice provides a list of best practices that have been adopted by other firms.
Posted on April 16, 2010
The Canadian Securities Administrators (CSA) today published amendments to National Instrument 24-101 Institutional Trade Matching and Settlements, its companion policy and related forms. Proposed amendments to NI 24-101, initially published for comment in October 2009, originally considered postponing, from July 1, 2010 to July 1, 2015, the requirement to match DAP/RAP trades by no later than midnight on the trade date. Based on comments received to the earlier proposals, however, the CSA have now decided to maintain the current institutional trade matching requirement of noon on T+1.
Other changes to the Instrument were adopted, however, and the final changes include: (i) amendments to the quarterly exception reporting requirement; (ii) amendments to the pre-DAP/RAP trade execution documentation requirements and related key definition; (iii) amendments to the provisions governing non-western hemisphere institutional investors; and (iv) amendments to clarify certain other definitions and concepts.
The amendments are subject to Ministerial approval and are expected to come into force on July 1, 2010.
Posted on April 16, 2010
The U.S. Senate Committee on Agriculture, Nutrition and Forestry introduced a draft bill today intended to "bring 100% transparency" to financial markets. According to the news release of Committee Chair Blanche Lincoln, D-Ark, the bill includes mandatory clearing and trading requirements, requires real-time reporting of derivatives trades and would prohibit federal assistance to banks that "engage in risky derivative deals". Thus, the proposed legislation appears to take a tougher stance in its attempts to regulate financial institutions than the legislative proposals emanating from the Senate Committee on Banking, Housing, and Urban Affairs.
The U.S. House of Representatives passed comprehensive financial reform legislation in December 2009, which addressed OTC derivatives trading, but the Senate has yet to pass the House Bill or agree to a different proposal. The latest indications, however, are that the Senate is preparing for a vote in the upcoming weeks. What the final regulations will look like, however, remains unclear.
Posted on April 15, 2010
The U.S. Securities and Exchange Commission (SEC) yesterday proposed creating a "large trader" reporting system that would identify large market participants, collect information regarding their trades and analyze their trading activity. Traders would generally be considered to fit the "large trader" categorization where their transactions in exchange-listed securities equalled or exceeded two million shares or $20 million during any calendar day, or 20 million shares or $200 million during any calendar month. The proposals would require such traders to identify themselves to the SEC and impose recordkeeping and reporting obligations on the part of broker-dealers.
Meanwhile, the SEC also proposed extending two investor protection measures, currently existing in stock markets, to options markets. Specifically, the SEC proposed prohibiting an option exchange from unfairly impeding access to displayed quotes and limiting the fees that an options exchange can charge those wishing to access a quote.
Comments on the proposals are being accepted for 60 days after their publication in the Federal Register.
Posted on April 14, 2010
The International Monetary Fund (IMF) recently released a chapter of its semiannual Global Financial Stability Report dealing with over-the-counter derivatives. Specifically, the chapter considers the role of central counterparties in making OTC derivatives markets "safer and sounder" and reducing counterparty risk.
Posted on April 9, 2010
The Investment Industry Regulatory Organization of Canada (IIROC) today published proposed amendments to its Dealer Member Rules intended "to promote compliant trade matching practices, as well as to eliminate the sending of duplicative trade related correspondence to clients." Specifically, amendments to Rule 800.49 would: (i) extend the trade reporting requirement; (ii) define a "non-exchange trade"; (iii) provide guidance to allow Dealer Members to classify trades as being either compliant or non-compliant with reporting requirements; and (iv) establish an acceptable monthly compliant trade percentage threshold. Rule 200.1(h) is also subject to change, as an exemption to the trade confirmation requirement would be added in cases where certain conditions were met.
Posted on April 9, 2010
The Ontario Securities Commission (OSC) has approved amendments to the Rules of the Toronto Stock Exchange to eliminate the indicative calculated closing price feature on the TSX's Market On Close facility. The amendments were originally published for comment on May 30, 2008.
Posted on April 8, 2010
The Canadian Securities Administrators (CSA) announced last week that all CSA members except Ontario have issued an order, effective March 27, exempting from the dealer registration requirement scheduled banks, certain other financial institutions, and federally and provincially regulated loan, trust and insurance companies, for trades in a "negotiable promissory note or commercial paper maturing not more than one year from the date of issue", provided the instrument is: (i) not convertible or exchangeable into or accompanied by a right to purchase another security other than a security described in the order, and (ii) has an approved credit rating as specified in the order.
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Posted on April 8, 2010
On February 17, the U.S. Financial Industry Regulatory Authority (FINRA) filed proposed changes to its Rules with the SEC intended to prohibit abuses in the allocation and distribution of shares in IPOs. The release amends earlier FINRA proposals by addressing issues raised by comments to its earlier proposed changes. The SEC published the proposed amendments for comment on March 11.
Posted on April 7, 2010
The New Brunswick Securities Commission (NBSC) yesterday published a proposed amendment to Local Rule 91-501 Derivatives. LR 91-501, which came into force on September 28, 2009, imposes registration and risk disclosure requirements in respect of trades in "derivatives" as defined in the Rule, other than trades among qualified parties.
The proposed amendment published yesterday would modify the language respecting the exemption to state that the registration requirement does not apply "where each party to the trade is a qualified party acting as principal". The change is being proposed in light of inquiries from industry and should clarify the NBSC's intention that the exemption only applies where both parties are qualified parties acting as principal.
The NBSC is accepting comments on the proposed amendment until June 7, 2010. For more information on LR 91-501, see our post of March 25 respecting a derivatives FAQ published by the NBSC.
Posted on April 7, 2010
The U.S. SEC announced on March 25 that its staff is conducting a review of the use of derivatives by mutual funds, exchange-traded funds (ETFs) and other investment companies to determine whether additional protections for those funds are required under the Investment Company Act of 1940 (the Act) . Staff of the SEC also intend to identify if any changes to the SEC's rules or guidance may be warranted. Pending the completion of the review, SEC staff will be deferring consideration of exemptive requests under the Act to permit ETFs that would make significant investments in derivatives.
Posted on April 1, 2010
The U.K. Financial Services Authority (FSA) announced new rules last week intended to improve the clarity respecting the costs charged by investment advisers. Specifically, as of 2011, firms will need to be upfront with respect to the costs of their services and will no longer be able to embed the cost of their advice in the cost of a product. Further, firms will not be permitted to accept commissions for recommending specific products. According to FSA director Sheila Nicoll, “[t]here is a need to reconnect the adviser and client, where one pays for the services of another, and without the distraction of commission. Only then can consumers have real confidence and trust in the advice they are receiving.”
Posted on April 1, 2010
On March 26, the Investment Industry Organization of Canada (IIROC) published proposed guidance respecting “locked” and “crossed” markets. The proposed guidance would replace previous guidance that was recently repealed in light of amendments to National Instrument 23-101 Trading Rules. Specifically, IIROC’s proposed guidance would provide assistance in complying with the relevant provisions of NI 23-101 and its Companion Policy, as well as with the “best price” and “best execution” obligations under UMIR.
Posted on March 29, 2010
The European derivatives exchange Eurex recently announced that Quebec's Autorité des marchés financiers (AMF) has provided a regulatory exemption allowing Eurex to offer its products in Quebec. According to the Eurex release, Quebec customers will now have direct access to trading on its exchange.
Posted on March 25, 2010
As we reported back in January, the New Brunswick Securities Commission published answers to frequently asked questions regarding Local Rule 91-501 Derivatives. Last week, the NBSC published a revised notice expanding on its answer regarding whether the rule applies to spot foreign exchange contracts. Specifically, the revised notice states that "LR 91-501 does not apply to spot foreign exchange transactions involving the purchase or sale of a currency (i.e. transactions such as changing money at a currency exchange or withdrawing cash at a foreign ATM)." Whether other spot foreign exchange transactions are subject to LR 91-501, however, remains unclear, as the NBSC's use of "i.e." raises questions as to whether the example provided was intended to be comprehensive.
Posted on March 24, 2010
Earlier this month, the Committee of European Securities Regulators (CESR) released a report recommending a pan-European short selling disclosure regime. While acknowledging that legitimate short selling plays an important role in financial markets by contributing to efficient price discovery, increasing market liquidity and facilitating hedging and other risk management activities, the report also cites concerns that it can be used in an abusive fashion. Specifically, short selling can drive down the price of financial instruments to a distorted level, contribute to disorderly markets and, especially in extreme market conditions, otherwise have an adverse impact on financial stability. In the interests of enhanced transparency about short selling activity, the objective in developing the disclosure model proposed by the disclosure requirement is to reduce or mitigate the negative consequences and risks of short selling without having an undue adverse impact on the benefits which the practice brings to markets.
The report proposes a two tier disclosure system whereby a short position reaching a specified initial threshold (0.2% of a company's issued share capital) would need to be disclosed to the relevant regulator. Incremental changes of short position of 0.1% would require further notification to the regulator, while a second threshold (0.5%) would also trigger a public disclosure requirement.
Posted on March 9, 2010
The Canadian National Stock Exchange (CNSX) announced yesterday that the U.S. Securities and Exchange Commission (SEC) has designated it a "Designated offshore securities market" under Regulation S of the Securities Act of 1933. The designation applies to CNSX and Pure Trading.
Regulation S allows companies to bypass SEC registration requirements where offerings and sales of securities occur outside the U.S. The exemptions were created in order to encourage investments in U.S. companies by non-U.S. investors and provide safe harbours with respect to offers and sales by issuers, distributors and affiliates under Rule 903 and offshore resales under Rule 904. Regulation S, however, imposes a number of resale restrictions to ensure sales to a U.S. person do not occur.
The SEC designation, however, means that restricted securities may now generally be resold on CNSX or Pure Trading without the seller having to determine whether the buyer is in the U.S. or a U.S. person, as would otherwise have been the case.
Posted on March 8, 2010
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On February 26, 2010, members of the Canadian Securities Administrators (CSA) each issued omnibus/blanket orders in response to applications requesting exemptions from certain provisions of National Instrument 31-103 Registration Requirements and Exemptions (31-103). 31-103, together with amendments to related instruments and policies, came into effect on September 28, 2009 (the Effective Date). Notice of these orders was provided under CSA Staff Notice 31-315 Omnibus/Blanket Orders exempting registrants from certain provisions of National Instrument 31-103 Registration Requirements and Exemptions, which was also published on February 26, 2010. The orders are summarized below.
Continuation of transition/grandfathering provisions for registrants adding jurisdiction
Each regulator issued an order that provides a person or company adding a jurisdiction to his, her or its registration, with the benefit of certain grandfathering and transition provisions provided under Part 16 of 31-103 in that additional jurisdiction. Specifically, those grandfathering and transition provisions that deal with proficiency, capital, insurance, relationship disclosure information, referral arrangements, dispute resolution service and client statement requirements were included in the order. To rely on the order, the registrant must: (i) have been continuously registered in a jurisdiction in Canada since the Effective Date; (ii) remain registered in that jurisdiction during its reliance on the order; (iii) be exempt under the relevant section of Part 16 in that jurisdiction; and (iv) register, after the Effective Date, in the same category of registration (and in the case of an individual, with the same sponsoring firm) in an additional jurisdiction.
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Posted on March 5, 2010
The Canadian Securities Administrators (CSA) and the Investment Industry Regulatory Organization of Canada (IIROC) are hosting a forum on March 23 at the Design Exchange in Toronto to discuss Consultation Paper 23-404, "Dark Pools, Dark Orders, and Other Developments in Market Structure in Canada", published in September 2009. Interested parties can register on the IIROC website.
Posted on March 5, 2010
The U.S. Securities and Exchange Commission (SEC) adopted a new short selling rule on February 24, 2010. The new rule is intended to promote market stability and preserve investor confidence during periods of stress and volatility by restricting short sellers from being able to drive the price of a stock further down when it is already experiencing downward pressure. Short selling involves the sale of stock that an investor does not own or has borrowed, where the investor intends to profit by buying the stock back at a price that is lower than the price of the short sale. While acknowledging that short selling may be useful in that it can promote market liquidity and pricing efficiency, the SEC cautions that it may also be used to "improperly drive down the price of a security or to accelerate a declining market in a security."
The SEC considered various options over the course of the last year to address its concerns regarding short selling and has decided to implement an alternative uptick rule that would restrict short selling when the price of a security has fallen more than 10% in one day. This restriction would remain in effect for the remainder of the day as well as the next day and under such a scenario, short selling would only be permitted if the price of the security was above the current national best bid. The rule will apply to all equity securities that are listed on a national securities exchange, whether traded on an exchange or in the over-the-counter market, and requires trading centers to establish, maintain, and enforce written policies and procedures that are reasonably designed to prevent the execution or display of a prohibited short sale. The rule will become effective 60 days after its publication in the Federal Register, while market participants will have six months to comply with its requirements.
Posted on February 19, 2010
The Canadian Securities Administrators (CSA) published implementation milestones today for the order protection rule contained in recent amendments to National Instrument 23-101 Trading Rules. The order protection rule, which comes into effect on February 1, 2011, requires marketplaces to establish and ensure compliance with policies and procedures designed to prevent trade-throughs on that marketplace. The CSA notice, meanwhile, aims to facilitate implementation of the order protection rule by establishing various technical milestones for marketplaces to meet. According to the notice, marketplaces will be expected to provide the CSA with information regarding their progress on each milestone date. The CSA are also encouraging marketplaces to consider whether to publicly disclose progress-related information. A notice providing details about an industry-wide test is expected to be published by the CSA in the coming months.
Posted on February 18, 2010
On February 12, the Alberta Securities Commission issued a blanket order making available certain limited trade-based registration exemptions to persons who would otherwise be required to register as exempt market dealers in Alberta. As previously discussed, with the implementation of the new registration regime and National Instrument 31-103 Registration Requirements and Exemptions, trade-based registration exemptions that parallel prospectus exemptions available under National Instrument 45-106 Prospectus and Registration Exemptions are to be repealed on March 27, 2010.
Pursuant to the blanket order, effective March 27, 2010, an exemption from the EMD registration requirement will be available for persons trading in securities in reliance on certain prospectus exemptions under NI 45-106, specifically, section 2.3 ("accredited investor"), section 2.5 ("family, friends and business associates"), section 2.9 ("offering memorandum") and section 2.10 ("minimum investment amount").
The blanket order, however, applies only where certain conditions are met. Specifically, the person or company seeking to rely on the exemption: (i) must not be registered or required to be registered in any jurisdiction, including a foreign jurisdiction; (ii) must not have provided advice to the purchaser with respect to suitability; (iii) must obtain from the purchaser a signed risk acknowledgement in the form prescribed by the blanket order; (iv) must not have provided financial services to the purchaser at any time (other than in connection with a prospectus-exempt distribution under sections 2.3, 2.5, 2.9 or 2.10 of NI 45-106); (v) must not hold or have access to the purchaser's assets; and (vi) must electronically file with the ASC a current or updated information report in the prescribed form within ten days of relying on the exemption. A notice issued along with the blanket order provides additional guidance with respect to the applicable requirements.
Alberta, which is the first of the "North West" jurisdictions to issue such a blanket order, is expected to be joined by British Columbia, Saskatchewan, Manitoba, Northwest Territories, Nunavut and the Yukon Territory, whose regulators have announced their intention to issue similar orders.
For more information on the impact of the new registration regime on dealers trading in the exempt market, see our July 2009 publication: "Impact on Limited Market Dealers and Unregistered Dealers Trading in the Exempt Market".
Posted on February 18, 2010
In December 2009, the U.S. Securities and Exchange Commission (SEC) published final amendments to its rules to enhance proxy disclosure. Proposed amendments were first released in July 2009 and the final rules reflect changes made in response to many of the comments received by the SEC in response to the proposed amendments.
Specifically, the final rules intend to improve the information that companies provide to shareholders regarding: (i) risk, by requiring disclosure respecting the board's role in risk oversight and, where relevant, disclosure respecting compensation policies and practices that are likely to expose the company to material risk; (ii) governance and director qualifications, by requiring expanded disclosure of the background and qualifications of directors and nominees, as well as disclosure concerning a company's board leadership structure; and (iii) compensation, by amending the reporting of stock and option awards and requiring, in certain circumstances, the disclosure of compensation consultants' potential conflicts of interest.
The amendments are effective as of February 28, 2010.
Posted on February 17, 2010
The U.S. Securities and Exchange Commission (SEC) announced in January that it was seeking public comment on issues respecting the current equity market structure. In publishing the concept release, the SEC specifically cited the dramatic change in the secondary market for equities in recent years and the trend towards a market structure with primarily automated trading. Thus, the SEC intends to assess "whether market structure rules have kept pace with, among other things, changes in trading technology and practices". The release seeks specific comment on issues such as market quality metrics, the fairness of market structure, high frequency trading, co-location services and dark liquidity. The SEC will use the comments received to help determine whether additional regulatory measures are needed to improve the current equity market structure. Further, the SEC also proposed for public comment a new market structure initiative that is intended to strengthen the risk management control of broker-dealers that provide market access.
Posted on February 16, 2010
In early January,
Chairman Gary Gensler of the U.S.
Commodity Futures Trading Commission, gave a
speech to the Council on Foreign Relations in New York regarding the reform of over-the-counter derivatives markets. Chairman Gensler discussed the three key components to reform, being the explicit regulation of derivatives dealers, the increase in transparency of OTC derivatives markets and a move of standard OTC derivative transactions to regulated clearinghouses. Chairman Gensler gave
a speech on the same topic on January 12 to the Atlantic Council. Legislation intended to regulate OTC derivatives
passed the U.S. House of Representatives in December 2009.
Posted on February 11, 2010
On January 14, the Saskatchewan Financial Services Commission, the securities regulator for the province of Saskatchewan, announced that it will participate along with other "North Western" jurisdictions in making available certain trade-based registration exemptions to persons who would otherwise be required to register as exempt market dealers. As a result of the implementation of the new registration regime and National Instrument 31-103 Registration Requirements and Exemptions, trade-based registration exemptions that parallel prospectus exemptions available under National Instrument 45-106 Prospectus and Registration Exemptions are to be repealed on March 27, 2010.
Pursuant to a blanket order to be issued by the SFSC, an exemption from the EMD registration requirement will be made available for persons trading in securities in reliance on certain prospectus exemptions, including the "accredited investor" and the "minimum investment amount" exemptions under section 2.3 and section 2.10 of NI 45-106, provided the conditions set out in the blanket order are satisfied. Saskatchewan will be joining Alberta, British Columbia, Manitoba, Northwest Territories, Nunavut and the Yukon Territory, whose regulators had previously announced their intention to issues similar blanket orders. The orders granting the exemption are anticipated to be issued on March 27, 2010.
For more information on the impact of the new registration regime on dealers trading in the exempt market, see our July 2009 publication: "Impact on Limited Market Dealers and Unregistered Dealers Trading in the Exempt Market".
Posted on February 11, 2010
IIROC yesterday repealed an earlier notice that provided guidance on "locked" and "crossed" markets in the context of a dealer's obligations under the Universal Market Integrity Rules (UMIR). The repeal of the guidance results from recent amendments to NI 23-101 Trading Rules and its Companion Policy, which contain provisions regarding locked and crossed markets.
Posted on February 3, 2010
Silver v. IMAX Corporation et al. [2009] O.J. Nos. 5573 and 5585 (S.C.J.)
Simon Bieber and Jennifer Imrie
On December 14, 2009, Justice van Rensburg of the Ontario Superior Court of Justice handed down two related rulings in the Silver v. IMAX Corporation litigation. The first (the “Leave Decision”) granted the plaintiffs leave to proceed with their class action against IMAX Corporation and certain individual respondents (collectively, the “IMAX Defendants”) under section 138.8 of Ontario’s Securities Act (“OSA”), while the second (the “Certification Decision”) certified the action, including both statutory and common law claims, as a class proceeding.
The Leave Decision is the first to consider the leave requirements for a statutory misrepresentation claim under the secondary market liability provisions in Part XXIII.1 of the OSA, while the Certification Decision appears to accept the “efficient market” (or “fraud on the market”) theory for common law misrepresentation claims. Justice van Rensburg permitted certification despite the defendant’s argument that the claim as pleaded is deficient for not alleging individual reliance by each member of the proposed class and accepted the plaintiffs’ argument that certification should extend to a global class of plaintiffs consisting of all persons who acquired securities of IMAX Corporation (“IMAX”) during the defined “Class Period” of February 17, 2006 to August 9, 2006 and who continued to hold some or all of those securities at the close of trading on August 9, 2006.
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Posted on February 3, 2010
On February 1, the Canadian Securities Administrators (CSA) released its 2009 Enforcement Report. According to the report, 141 enforcement cases were concluded in 2009, resulting in over $153 million in fines and administrative penalties ordered and over $92 million in restitution, compensation and disgorgement. The fines and penalties assessed in 2009 represented a large increase from the $12 million ordered in 2008. The report also discusses the preventative measures employed by the CSA as well as the sharp increase in the use of reciprocal orders since 2008. Meanwhile, a number of case summaries are presented in the report to describe the main categories of violations and to illustrate the type of activity that constitutes each type of violation.
Posted on February 1, 2010
CDS Clearing and Depository Services Inc. (CDS) recently published proposed amendments to its rules regarding the processes for issuing, transferring and maintaining custody of money market securities in CDSX. Specifically, the amendments (i) clarify the process by which securities become eligible for CDSX; (ii) provide for an exception allowing CDS to release confidential information concerning a participant where the information concerns material risk events; (iii) create a single, uniform qualification for all participants acting as issuer agents; and (iv) create new internal control standards for participant issuer agents.
CDS is accepting comments on the proposed amendments for 30 calendar days following the January 29th publication of the proposals.
Posted on January 26, 2010
On January 7, the New Brunswick Securities Commission (NBSC) published NBSC Notice 91-701 to respond to certain frequently asked questions on NBSC Local Rule 91-501 Derivatives (the Rule). As discussed in our previous update dated December 14, 2009, the Rule imposes registration and risk disclosure requirements in respect of trades in “derivatives” as defined in the Rule, other than trades among qualified parties.
The notice clarifies that a qualified party that engages in a derivatives transaction is responsible for determining whether the other party is also a qualified party. To do so, it may rely on factual statements made by the other party provided that it does not have reasonable grounds to believe that the statements are false. The qualified party is also responsible for determining whether the exemptions under the Rule are applicable based on the facts supplied by the other party and should retain all documentation relating to its determination.
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Posted on January 22, 2010
On January 12, 2010, the Minister of Finance approved amendments to National Instrument 21-101 Marketplace Operation and National Instrument 23-101 Trading Rules, which were originally published in November 2009 with technical corrections made in December 2009. The amendments not related to the "order protection rule" (i.e. changes other than to Part 6 of NI 23-101) are scheduled to come into force on January 28, 2010. Those related to the "order protection rule" will come into force on February 1, 2011. The Canadian Securities Administrators intend to publish a notice shortly that will outline the expected milestone dates regarding the implementation of the "order protection rule".
Posted on January 22, 2010
On January 11, ICE Futures Canada published a notice regarding amendments to its Rules in order to "more accurately define the information which should be contained" in the "FIX tags" used to identify traders and companies on trades submitted via ISV front-end trading systems.
Posted on January 8, 2010
The Investment Industry Regulatory Organization of Canada (IIROC) today announced that securities regulators have approved amendments to the Universal Market Integrity Rules (UMIR) respecting trading during certain securities transactions. Rule 7.7 of the UMIR governs the activities of dealers, issuers and others in connection with a distribution of securities, securities exchange take-over bid, issuer bid or amalgamation, arrangement, capital reorganization or similar transaction. Rule 7.7, paralleled OSC Rule 48-501 Trading During Distributions, Formal Bids and Share Exchange Transactions prior to approval of these amendments. While some provisions of Rule 7.7 will now differ from OSC Rule 48-501, both rules will remain substantively similar and it is intended they will be applied in a consistent manner. Among other things, the amendments:
- modify the exemption governing bids or purchases of certain securities during restricted periods by permitting such bids at the best independent bid price at the time of order entry rather than at the last independent sale price;
- replace the requirement that a mutual fund be designated by the market regulator prior to qualifying as an exempt exchange-traded fund with a provision that any mutual fund with units that are listed or quoted security in continuous distribution in accordance with legislation would qualify unless the regulator has designated the mutual fund to be a security excluded from the definition of "Exempt Exchange-traded Fund";
- clarify the definition and interpretation of "restricted period";
- clarify the types of private placements that may become subject to restrictions under Rule 7.7 of UMIR;
- clarify that in determining the "best ask price" or "best bid price", reference is made only to orders contained in a consolidated market display for a marketplace that is then open for trading; and
- make further consequential and editorial amendments.
The amendments are effective as of today, January 8, 2010.
Posted on December 4, 2009
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The British Columbia Securities Commission today published a Companion Policy to Blanket Order 91-502 Short Term Foreign Exchange Transactions to clarify when a foreign exchange contract may be considered a "security" for the purposes of the British Columbia Securities Act.
The Companion Policy states that under s. 1(1) of the Securities Act, the following three components of the definition of “security” could describe a forex contract:
(a) a document, instrument or writing commonly known as a security;
...
(l) an investment contract;
...
(n) an instrument that is a futures contract or an option but is not an exchange contract.
The Blanket Order states that a contract or other obligation to purchase or sell the currency of any jurisdiction, where the terms of the transaction require settlement not later than three business days after the entering into of the transaction, is not a futures contract, provided that the contract or obligation is not otherwise a security under the Securities Act. The purpose of the Companion Policy is to clarify that the Blanket Order is limited to determining when a foreign exchange contract is not a futures contract. A forex contract may still be a “security” if it falls under any of the other relevant branches of the definition.
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Posted on November 16, 2009
As described in our post of October 21, the U.S. Securities and Exchange Commission (SEC) recently voted to propose measures intended to increase the transparency of private automated trading systems known as "dark pools". On November 13, the SEC published its proposed rules and amendments to joint-industry plans. The proposals would: (i) amend the Exchange Act quoting requirements so as to apply expressly to actionable "Indications of Interest", which are similar to a typical buy or sell quote and permit others to trade; (ii) revise the order display requirements of Regulation ATS, including a substantial lowering of the trading volume threshold that triggers public display obligations for alternative trading systems; and (iii) amend the joint-industry plans for publicly disseminating consolidated trade data to require real-time disclosure of the identity of dark pools and other alternative trading systems on the reports of their executed trades.
Posted on November 13, 2009
The Canadian Securities Administrators (CSA) published a notice today outlining amendments to National Instrument 21-101 Marketplace Operation, National Instrument 23-101 Trading Rules and their related companion policies. The amendments follow in the footsteps of earlier proposals, discussed in our post of October 2008. Meanwhile, the Investment Industry Regulatory Organization of Canada (IIROC) published a notice today regarding proposed amendments to the Universal Market Integrity Rules that would complement the changes announced by the CSA.
Under the CSA amendments, an order protection rule would require marketplaces to establish and ensure compliance with policies and procedures designed to prevent trade-throughs on that marketplace. Such protection is intended to ensure that all immediately accessible, visible, better-priced limit orders are executed before inferior-priced limit orders and are not traded through. A number of exceptions to the prohibition, however, are included in the amendments, including directed-action orders, non-standard orders, closing-price orders and trade-throughs that occur when the best protected bid is higher than the best protected offer (crossed market). Amendments respecting fair access to marketplaces, trading fee limitations and locked and crossed markets were also included under the order protection rule. Additional changes are also being made to marketplace systems, transparency requirements and the technological requirements and obligations of an information processor.
Subject to Ministerial approvals, the changes other than those relating to the Order Protection Rule are scheduled to come into force on January 28, 2010, while the Order Protection Rule will become effective on February 1, 2011.
Under IIROC's proposed amendments, meanwhile, rules and policies respecting "best price" obligations, which currently address order protection in Canada, would be repealed and a number of consequential changes to UMIR would also be implemented. Comments on IIROC's proposed amendments are being accepted until January 12, 2010.
Posted on November 6, 2009
On October 30, the British Columbia Securities Commission (BCSC) announced amended conditions of registration for investment dealers that maintain an office in British Columbia and trade in U.S. OTC markets, and who have not filed a prescribed form of undertaking. Specifically, the BCSC has clarifed certain aspects of the previous obligations, amended Form B (reporting of OTC trading commissions) and revised language to reflect National Instrument 31-103 Registration Requirements. Of particular note, the conditions now specify who can act as a designated individual, as IIROC has removed that definition from its Dealer Member Rules. Like their previous incarnation, the conditions of registration include the effective management of risks and monitoring, recordingkeeping and reporting requirements. An interpretation note was also published to explain how the BCSC interprets the conditions. The amended obligations are effective immediately and are set to expire on December 31, 2011.
Posted on November 6, 2009
As described in our earlier post, on October 9, the Ontario Securities Commission (OSC) introduced a new process for reviewing changes to certain operations of exchanges and ATSs. According to the notice, OSC Staff believe that proposals to operational changes to exchanges and ATSs should be subject to an appropriate degree of transparency. Thus, the OSC intends to apply new publication requirements in the case of proposed changes to order types or features/characteristics of orders, procedures regarding order entry, display and execution, and changes to procedures relating to special facilities or marketplace sessions. The OSC may also request that other changes be published if regulatory concerns are raised.
Generally, under the new procedures, exchanges and ATs must file with the OSC and publish a notice in the OSC Bulletin describing, among other things, the proposals, rationale and expected impact of the proposed changes. The OSC will review the proposals and market participants will be afforded 30 days to provide feedback. Absent any regulatory concerns, the proposed changes would become effective 45 days after publication of the notice. In the case of regulatory concerns, the OSC would work with the exchange or ATS to resolve the issues, but implementation may be delayed in such a case.
Posted on October 30, 2009
The Canadian Securities Administrators (CSA) have recently published proposed amendments to National Instrument 24-101 Institutional Trade Matching and Settlement (NI 24-101) and its companion policy for a 90 day comment period. Principally, the proposed amendments would postpone, from July 1, 2010 to July 1, 2015, the requirement to match DAP/RAP trades by no later than midnight on the trade date. Further, the CSA are proposing to extend for two years the current deadline for matching DAP/RAP trades from noon on the business day following the trade to 2:00 p.m. on the business day following the trade. Documentation and exception reporting requirements, meanwhile, would also be amended under the proposals. Comments are being accepted on the proposals until January 28, 2010.
For more information on the history of NI 24-101, see our posts of June 8, 2007 and September 14, 2007.
Posted on October 27, 2009
In response to numerous inquiries, the Ontario Securities Commission (OSC) issued a notice today outlining the OSC Staff's view on the applicability of securities laws to offerings of Contracts for Difference (CFDs), foreign exchange contracts (FX contracts) and similar OTC derivative products. While the notice focuses on CFDs, the guidance is intended to apply generally to FX contracts and OTC derivatives as well.
Specifically, OSC Staff consider CFDs to be securities and, as such, CFD providers offering such products to Ontario investors must comply with registration and prospectus requirements of Ontario securities law absent statutory exemptions or exemptive relief. The notice states, however, that as the prospectus requirement may not be well-suited for certain types of OTC derivative products, OSC staff "may be prepared to recommend relief" from the prospectus requirement under certain situations. The circumstances under which an exemption may be provided are discussed in the notice and an example of such an exemption was provided last week.
The notice is intended to provide interim guidance until such time that a harmonized approach to the regulation of OTC derivatives is developed by the Canadian Securities Administrators and/or Ontario introduces derivatives legislation.
Posted on October 21, 2009
The U.S.
Securities and Exchange Commission (SEC) today
voted to propose measures to increase transparency of private automated trading systems known as "dark pools". Such private systems do not display quotes in the public quote stream and, according to the SEC, the lack of transparency associated with dark pools could create a "two-tiered market that deprives the public of information about stock prices and liquidity." As such, the SEC's proposals include requiring the public disclosure of information regarding "Indications of Interest" (IOIs), which are similar to a typical buy or sell quote and permit others to trade. As described in
our post of June 19, SEC Chairman Mary Schapiro has discussed the need to regulate dark pools in the past, while in Canada, regulators
recently published a consultation paper on the subject.
The SEC is inviting public comments on the proposals, which have yet to be published on the SEC website, for 90 days after their publication in the Federal Register. For more information, see the text of Ms. Schapiro's speech before the SEC's open meeting as well as the SEC fact sheet on the subject.
Posted on October 19, 2009
On October 16th, the Ontario Securities Commission (OSC) granted relief on an application by CMC Markets U.K. and its Canadian affiliate allowing CMC Canada to distribute contracts for difference and foreign exchange contracts (collectively, CFDs) to Ontario investors without having to file a prospectus. CFDs are derivative products that "allow clients to obtain exposure to markets and instruments that may not be available directly, or may not be available in a cost-effective manner."
In granting the relief, the OSC stated that the requested relief would "substantially harmonize the Commission's position on the offering of CFDs to investors in Ontario with how those products are offered to investors in Quebec" under the Derivatives Act (Quebec). Under the QDA, such products may be offered through the distribution of a standardized risk disclosure document rather than a prospectus. The OSC noted that it had previously recognized that similar disclosure may be better suited for such products than a prospectus.
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Posted on October 16, 2009
The U.S. House Committee on Financial Services yesterday approved draft legislation to regulate over-the-counter derivatives. Among other things, the legislation requires that: (i) standardized swap transactions be executed on a national securities exchange, board of trade or swap execution facility; (ii) swap dealers and major participants register with the appropriate commission; and (iii) reporting and recordkeeping obligations are met. The U.S. Treasury Department first proposed such legislation in mid August.
Posted on October 15, 2009
On October 1, the U.S. House Committee on Financial Services released, among other bills, a discussion draft of the Investor Protection Act. The IPA is intended to strengthen the powers of the Securities and Exchange Commission, while enhancing the SEC's enforcement powers and funding. Further, under the draft bill, all financial intermediaries that provide advice would have a fiduciary duty toward their customers and the SEC would also be granted the authority to prohibit or impose limitations on arbitration clauses respecting customer contracts.
On October 2, meanwhile, the Committee circulated a discussion draft of legislation intended to regulate over-the-counter derivatives. According to a committee member, the OTC bill "moves us in the right direction by reducing risk to the economy with robust and dynamic oversight of major market participants, while preserving appropriate risk-management tools for end users." The Committee is began meeting yesterday to discuss the OTC bill.
Posted on October 9, 2009
The Ontario Securities Commission (OSC) released a notice today respecting the review by OSC staff of the regulatory requirements for stock exchanges and alternative trading systems and their practices. The OSC identified the first phase of the review as focusing on initiatives "that can be taken in the short-term on the transparency of filings" by exchanges and ATSs where their operations are similar. The next phase of the review will consider the requirements set out in National Instrument 21-101 Marketplace Operations to ensure that marketplace rules "are able to provide for flexibility in a competitive environment while providing regulators with the information they need to meet their mandate." The notice released today also sets out the process for reviewing changes to exchange and ATS operations.
Posted on October 7, 2009
Jennifer Northcote | PDF Version | Version française
Yesterday, the Canadian Securities Administrations (CSA) published the final version of National Instrument 23-102 Use of Client Brokerage Commissions and the accompanying companion policy. The instrument and policy seek to regulate soft dollar arrangements across Canada, stipulating the types of goods and services that may be acquired with client brokerage commissions and prescribing related disclosure requirements. The instrument and policy apply to registered advisers, who obtain the goods and services and to registered dealers, who accept the brokerage commissions.
NI 23-102 and its companion policy were initially published in July 2006. The 2006 proposals applied to all types of transactions where brokerage commissions or similar transaction-based fees were charged, and imposed duties on advisers to ensure that soft dollars were used to benefit the client and were reasonable in relation to the value of goods and services received. The proposals further specified that the goods and services acquired using client brokerage commissions were restricted to "order execution services" and "research", and prescribed detailed disclosure requirements for advisers. In response to comments submitted, the CSA republished the proposals in January 2008. Substantive changes were made to the 2006 proposals regarding: (i) the breadth of the application of the instrument and policy; (ii) definitions of order execution services and research services; (iii) the framework for client brokerage commission practices; (iv) disclosure of client brokerage commission practices; and (v) the addition of a transition period.
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Posted on October 5, 2009
The Securities and Exchange Commission (SEC) today announced its approval of new exchange rules (see, for example, filings respecting NYSE Arca, NASDAQ and the Chicago Board Options Exchange) for "breaking stock trades that deviate so substantially from current market prices that they are considered 'clearly erroneous.'" Specifically, the rules seek to provide consistent standards across equity markets.
Generally, the rules provide that a trade may be found to be clearly erroneous only if the price of a transaction occurring during regular trading hours exceeds the consolidated last sale price by more than 10% for stocks priced under $25, 5% for stocks priced between $25 and $50 and 3% for stocks priced over $50. The thresholds are set at 20%, 10% and 6%, respectively, for transactions occurring outside of regular trading hours. A filing involving five or more securities will be aggregated into a single filing, to which a 10% threshold will apply. Further, the erroneous trade review process must generally begin within 30 minutes of the trade.
Compare these quite specific rules to the more general discretion that applies on Canadian marketplaces by virtue of UMIR Rule 10.9, which has resulted in cancellations being quite rare events in Canada.
Posted on October 2, 2009
On October 1, the Investment Industry Regulatory Organization of Canada (IIROC) published a guidance note relating to securities trading halts in coordination with the application of 'circuit breakers' on U.S. markets. In the U.S., trading halts occur based on trigger levels of 10%, 20% and 30% drops of the Dow Jones Industrial Average, calculated at the beginning of each quarter using the previous month's average closing value. The NYSE thresholds have been announced for the fourth quarter of 2009 as 950 points, 1,950 points and 2,900 points respectively.
It is IIROC's policy that it will coordinate trading halts with U.S. markets, but for days when Canadian markets are open and American markets are closed, IIROC has published related triggers based on drops in the S&P/TSX Composite. The TSX trigger levels are: Level 1 (10%) - 1,150 points; Level 2 (20%) - 2,250 points and Level 3 (30%) - 3,400 points, with the effects of the triggers depending on the time of day the threshold drop occurs. Triggering the Level 1 threshold between 2:00 and 2:30 p.m. results in a 30 minute halt in trading, while trading would be shut down for the rest of the day should a Level 3 halt occur.
Posted on October 2, 2009
The U.K. Financial Services Authority (FSA) released a Feedback Statement yesterday summarizing and responding to comments it received in response to its proposals on regulating short selling as published in a discussion paper of February 2009. While the discussion paper concluded that direct constraints on short selling, such as a 'tick' rule, were not justified, it proposed enhancing the transparency of short selling. In considering the feedback received, the FSA reiterated its position that direct constraints on short selling are not justified at this point, while also stating that no major aspects of the proposals for a disclosure regime should change.
Posted on October 2, 2009
The International Organization of Securities Commissions (IOSCO) recently released a consultation report respecting the transparency of structured finance products. The report sets out the factors to be considered by market authorities when considering the enhancement of post-trade transparency of structured finance products. Meanwhile, the Joint Forum, established under the auspices of the Basel Committee on Banking Supervision, IOSCO and the International Association of Insurance Supervisors recently released a report considering the issues surrounding special purpose entities.
Posted on September 30, 2009
The Canadian Securities Administrators (CSA) and the Investment Industry Regulatory Organization of Canada (IIROC) today announced the publication of Joint Consultation Paper 23-404, entitled "Dark Pools, Dark Orders, and Other Developments in Market Structure in Canada". The paper discusses the evolution of the Canadian market and specifically considers the emergence of multiple marketplaces. The lack of transparency associated with some alternative trading systems is noted and specific questions are raised regarding dark pools, dark orders, market pegged orders and smart order routers.
Written submissions on the issues set out in the consultation paper are being accepted until December 29, 2009. The CSA and IIROC also stated that they intend to convene a roundtable to discuss the issues and the submissions received.
Posted on September 29, 2009
Pursuant to amendments to the Bankruptcy and Insolvency Act and Companies' Creditors Arrangement Act that took effect on September 18, 2009, an automatic stay of proceedings initiated on the filing of a proposal or notice of intention does not apply to regulatory bodies acting strictly as regulators. As such, the Toronto Stock Exchange (TSX) announced yesterday that it intends to continue to investigate and take action against listed issuers that are insolvent or have made an assignment for the purposes of enforcing the continued listing requirements in section 708 of the TSX Company Manual. The TSX also confirmed that the temporary relief respecting the Remedial Review Process would expire as planned at the end of this month.
Posted on September 18, 2009
The U.S. Securities and Exchange Commission yesterday proposed a ban on flash trading, a practice that allows certain market participants to access information about the best available prices before the public is given an opportunity to trade. According to SEC Chairman Mary Schapiro, flash orders "provide a momentary head-start in the trading arena that can produce inequities in the markets and create disincentives to display quotes." Public comments on the amendments, which have yet to be published, are being accepted by the SEC until 60 days following their publication in the Federal Register.
Update: The proposed amendments have now been published.
Posted on August 28, 2009
On August 26, the Ontario Securities Commission released a decision refusing to intervene in a case where the TSX allowed a private placement of units of a real estate investment trust without unitholder approval. The application to review the TSX decision was brought by NorthWest Value Partners, which objected to, among other things, the placement proceeding without being put to a vote of unitholders. The placement represented approximately 49% of outstanding units of InterRent Real Estate Investment Trust.
The OSC noted that it was entitled to intervene in cases where (i) the TSX proceeded on an incorrect principle; (ii) the TSX erred in law; (iii) the TSX overlooked material evidence; and (iv) new and compelling evidence was presented to the OSC that was not presented to the TSX. It stated, however, that it would do so "only in the rare case" where an applicant met the "heavy burden of proving such intervention is justified" in accordance with the above principles or some other acceptable ground. In the immediate case, the OSC found that the TSX considered all the relevant information, assessed relevant considerations, followed the appropriate process and carefully articulated its reasons. As such, the application to review the decision was dismissed.
The OSC ruling was released on an expedited basis and full reasons are expected in the near future.
Posted on August 24, 2009
On August 11, the U.S.
Department of the Treasury announced that it had delivered to Congress
proposed legislation respecting the regulation of over-the-counter (OTC) derivatives. Treasury Secretary Timothy Geithner
spoke of the need for such regulation during testimony to Congress in July. According to the Department's press release, the proposed legislation "will provide for regulation and transparency for all OTC derivative transactions; strong prudential and business conduct regulation of all OTC derivative dealers and other major participants in the OTC derivative markets; and improved regulator and enforcement tools."
Specifically, the draft legislation requires that standardized OTC derivatives be centrally cleared by a securities or derivatives clearing organization, while encouraging the use of such standardized derivatives through higher capital and margin requirements for non-standardized derivatives. Financial regulatory agencies will have access on a confidential basis to OTC derivative transactions, while aggregated data on open positions and trading volumes will be available to the public. Meanwhile, federal banking agencies, the Commodity Futures Trading Commission and Securities and Exchange Commission will supervise and regulate OTC derivative dealers and major market participants. The Treasury Department hopes to have the reforms passed by the end of the year.
Posted on August 21, 2009
On August 17, 2009, the U.S.
Securities and Exchange Commission re-opened the comment period on its proposals respecting short sales first
published in April. The comment period was extended to allow for supplemental comments on an alternative uptick rule that was not previously specifically subject to the request for comments. In April, the SEC sought comments on proposals that represented two approaches to imposing restrictions on short selling; the first to apply on a market-wide and permanent basis and the second during severe market declines only. With respect to the proposed market-wide and permanent rules, two alternative short sale price tests were proposed. The first was based on the current national best bid (proposed modified uptick rule) and the second based on the last sale price (proposed uptick rule). While the April proposals did not specifically seek comments on the alternative uptick rule, which would permit short selling only at a price at or higher than the current national best bid, it did enquire whether it would be preferable to the proposed modified uptick rule and the proposed uptick rule.
Under the alternative uptick rule, in an advancing or declining market, short selling would generally only be permitted at an increment above the current national best bid. The alternative uptick rule proposal is slightly different from April's proposed modified uptick rule (and the proposed uptick rule), in that only allowing short selling at an increment above the national best bid would not allow short sale to get immediate execution and would, therefore, restrict short selling to a greater extent than the other two proposed rules. It would not, however, require monitoring the sequence of bids or last sale prices. According to the SEC’s press release, this alternative uptick rule would, as a result, be easier to monitor. The comment period for the proposal will extend for 30 days from the date of publication of the proposal in the Federal Register.
Posted on August 17, 2009
Kenneth G. Ottenbreit and Terry Doherty | PDF Version
Recent rulemaking across Canada and proposed rules in Quebec (if adopted) will have a significant impact on the cross-border trading activities of non-Canadian dealers, advisers, futures commission merchants (FCMs) and commodity-trading advisers (CTAs) with respect to commodity futures contracts and commodity futures options (futures) as well as security options.
On July 17, 2009, the Canadian Securities Administrators (CSA) published their final proposal for National Instrument 31-103 - Registration Requirements and Exemptions (31-103). Subject to governmental and other local approval requirements, 31-103 will come into force on September 28, 2009 (the Implementation Date). While the regulation of futures activities was not the focus of 31-103, the new securities registration rules will have some impact on the regulation of futures activities in Canada. For further information and a complete breakdown of the new regime, please refer to Stikeman Elliott’s Registration Reform in Canada: The Finish Line is Here.
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Posted on August 6, 2009
Earlier this month, CDS Clearing and Depository Services (CDS), announced that participants of the New York Link service, which allows CDS participants to clear and settle exchange and over-the-counter trades with U.S. broker-dealers via the National Securities Clearing Corporation (NSCC), will have to satisfy additional collateral requirements as of November 1, 2009. As of that date, CDS will "no longer have access to the collateral needed to protect the remaining New York Link participants from the default of a single sponsored participant." As such, CDS will require participants of the New York Link to provide additional collateral and may also require participants to pre-fund their NSCC payment obligations "from time to time". Participants have until September 30 to advise CDS whether they will remain a CDS-sponsored participant or become direct members of the NSCC and Depository Trust Company (DTC). According to CDS, "[b]ased on the number of participants who would be interested in continuing under the new requirements, CDS Clearing will evaluate the economic and risk containment impacts on operating these services." The Depository Trust & Clearing Corporation (the parent company of the NSCC and DTC), meanwhile, is prepared to "immediately begin processing membership applications of Canadian firms who wish to become members of its NSCC and DTC subsidiaries and who meet the membership criteria."
Posted on August 5, 2009
Earlier this year, the New York Stock Exchange (NYSE) adopted a temporary policy wherein the market capitalization continued listing standard would be reduced from $25 million to $15 million. The changes have now been made permanent as of July 2, 2009.
Posted on July 16, 2009
The British Columbia Securities Commission (BCSC) announced today that it is launching an expedited review process for mining companies seeking to distribute securities through the short form prospectus process. Citing the short window available to such companies to complete financing, the BCSC stated that it will use "best efforts" to review the company's SEDAR disclosure, including annual information forms and existing technical reports for compliance with National Instrument 43-101 Standards of Disclosure for Mineral Projects before the preliminary prospectus is filed. Companies for which British Columbia is the principal regulator may request such a review by emailing the BCSC's Chief Mining Advisor at least 10 days prior to filing the preliminary short-form prospectus.
Posted on July 7, 2009
On July 2, the Investment Industry Regulatory Organization of Canada (IIROC) published a guidance note relating to securities trading halts in coordination with the application of 'circuit breakers' on U.S. markets. In the U.S., trading halts occur based on trigger levels of 10%, 20% and 30% drops of the Dow Jones Industrial Average, calculated at the beginning of each quarter using the previous month's average closing value. The NYSE thresholds have been announced for the third quarter of 2009 as 850 points, 1700 points and 2600 points respectively.
It is IIROC's policy that it will coordinate trading halts with U.S. markets, but for days when Canadian markets are open and American markets are closed, IIROC has published related triggers based on drops in the S&P/TSX Composite. The TSX trigger levels are: Level 1 (10%) - 1,050 points; Level 2 (20%) - 2,050 points and Level 3 (30%) - 3,100 points, with the effects of the triggers depending on the time of day the threshold drop occurs. Triggering the Level 1 threshold between 2:00 and 2:30 p.m. results in a 30 minute halt in trading, while trading would be shut down for the rest of the day should a Level 3 halt occur.
Posted on July 6, 2009
The Joint Standing Committee on Retail Investor Issues today issued the Retail Information Survey Report, based on a survey of Canadians who use an investment advisor when making investment decisions. The Joint Standing Committee is made up of representatives of the Investment Industry Regulatory Organization of Canada, Mutual Fund Dealers Association, Ombudsman for Banking Services and Investments and Ontario Securities Commission, and was created with the purpose of, among other things, providing a forum for the discussion of retail investor issues. The report's findings provide insight into the way Canadian investors make decisions and their use of investment advisors and according to the release, provide data and analysis to assist the four organizations involved in their policy making activities with respect to retail investors.
Posted on June 10, 2009
The U.S. Government Accountability Office recently released a report with respect to its review of SEC rules and actions respecting naked short selling and failures to deliver. The report recommends that the SEC expedite the finalization of the temporary rule implemented in 2008 and develop a process that allows the SEC to "raise and resolve implementation issues that arise from SEC regulations".
For information on short sales in Canada, see our recent update of April 28, 2009.
Posted on June 5, 2009
On June 5, the CSA announced that, commencing July 1, 2009 and continuing for a period of five years, TSX Inc. (TSX) will act as an information processor for exchange-traded securities other than options under NI 21-101 Marketplace Operation. As described by the CSA, an information processor "provides consolidated data to investors and market participants, facilitating compliance with regulatory requirements." The CSA also published a "Questions and Answers" supplement to their notice respecting the role of the TSX.
Posted on May 25, 2009
On May 22, 2009, the Investment Industry Regulatory Organization of Canada (IIROC) released proposed amendments to Dealer Member Rule 1300.1, regarding the trading in securities of U.S. over-the-counter (OTC) issuers. Under the proposed amendments, Dealer Members would not be permitted to accept an order to sell OTC issuer securities until the dealer had "made the inquiries necessary to form a reasonable belief" that it knew the "true identity of every beneficial owner of those securities". In cases where the beneficial owner is not a natural person, the dealer would have to form a reasonable belief as to the identity of every natural person who controls the beneficial owner. Exemptions to this requirement would be permitted for American Depository Receipts and for any OTC securities for which the issuer has a class of securities listed or quoted on the TSX, TSXV, CNQ, NYSE, AMEX or NASDAQ and under certain circumstances, isolated trades.
The intention of the amendments is to "discourage abusive and illegal OTC market activity", which the notice stated has been a "source of scandal". IIROC cited the actions taken in British Columbia to prevent such abuse and the need to prevent such behaviour moving elsewhere within Canada. Comments on the proposed amendments are being accepted until July 21, 2009.
Posted on April 28, 2009
Simon Romano, Alex Colangelo and Ramandeep Grewal | PDF Version | Version française
The recent volatility in equity markets led to a variety of responses by regulators. A particularly popular response internationally was the introduction of limits to short sales of securities, a tool used in an attempt to ease the downward pressure on the value of certain companies. In the United States, for example, the Securities and Exchange Commission (SEC) prohibited short selling in the shares of financial companies in the fall of 2008, a move followed by the Ontario Securities Commission (OSC) restriction on short sales of securities of companies that were inter-listed on a US exchange and on the SEC’s restricted list. While these particular restrictions soon lapsed, the general rules respecting short sales in Canada have been under consideration by regulators for some time. Further, the Investment Industry Regulatory Organization of Canada (IIROC) recently released two studies related to short sales, one of which considered the effects of the recently imposed restrictions. This update, meanwhile, seeks to review the current rules respecting short sales in Canada, recent amendments and the proposals for change.
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Posted on April 28, 2009
The Toronto Stock Exchange (TSX) recently issued a staff notice providing listed issuers with guidance on submissions in connection with the use of the financial hardship exemption under subsection 604(e) of the TSX Company Manual. Subsection 604(e) provides an exemption from securityholder approval for certain transactions and was adopted to provide listed issuers with the opportunity to improve their financial situation in a timely manner when in serious financial difficulty.
Posted on April 13, 2009
On April 9, 2008, the Investment Industry Regulatory Organization of Canada published a notice regarding "locked" and "crossed" markets in the context of a dealer's obligations under the Universal Market Integrity Rules (UMIR). The guidance is intended to reflect the amendments to UMIR with respect to "best execution" and "best price" obligations, supplement and reaffirm certain guidance provided in Market Integrity Notice 2008-010 Complying with "Best Price" Obligations and provide guidance "with respect to the inappropriateness of certain recent practices associated with 'rebate arbitrage'."
Posted on April 9, 2009
On April 8, 2009, the U.S. Securities and Exchange Commission voted to seek public comment on proposals to impose short sale price restrictions or circuit breaker restrictions and “whether such measures would help promote market stability and restore investor confidence.” The introduction of an uptick rule would be permanent and market-wide, while a "circuit breaker" would limit short selling for particular securities for the remainder of the day in the case of a severe decline in the security’s price. The SEC plans to publish the full text of the full proposals as soon as possible.
The proposals are now available here.
Posted on April 2, 2009
On January 23, 2009, the Mutual Fund Dealers Association of Canada published Bulletin #0354-P with respect to proposed amendments to MFDA Rules relating to the sale of all principal protected notes (PPNs) aimed at ensuring that PPNs are subject to due diligence, KYC and suitability obligations. The CSA previously published a number of notices on the issue and, as set out in the MFDA's Bulletin, has requested that the MFDA take appropriate action. As such, the MFDA has stated that it intends to develop a discussion paper for consideration by the MFDA Policy Advisory Committee and had invited comments on the impact of potential amendments in order to assist MFDA staff in developing a proposal.
For more information, see also:
CSA Notice 46-303 - Principal Protected Notes (July 7, 2006)
CSA Notice 46-304 - Update on Principal Protected Notes (July 27, 2007)
CSA Notice 46-305 - Second Update on Principal Protected Notes (August 29, 2008)
Posted on March 13, 2009
The OSC has approved amendments to the procedures of Clearing and Depository Services Inc. (CDS) to reflect the transfer of the ISIN issuance service from CDS to a subsidiary as well as amendments to the rules of CDS relating to issuer electronic payments. The latter amendments will require that entitlement payments made to CDS be in electronic format as of November 1, 2011.
Posted on February 27, 2009
The Investment Industry Regulatory Organization of Canada (IIROC) has announced the deferral of the implementation date of certain amendments to the Universal Market Integrity Rules (UMIR) requiring the reporting of trade variations and unresolved failed trades. IIROC published a notice on October 15, 2008 approving the amendments and the implementation date had been set for March 1, 2009.
Posted on February 23, 2009
Earlier this month, the Manitoba Securities Commission issued a notice repealing the requirements imposed on mutual fund dealers and salespeople set out in MSC Staff Notice 2001-11 with respect to the sale of Labour Sponsored Investment Funds (LSIFs). The MSC indicated that the imposed requirements were no longer applicable.
Posted on February 5, 2009
On February 4, the Investment Industry Regulatory Organization of Canada (IIROC) released two studies related to short sales. The first study, "Recent Trends in Trading Activity, Short Sales and Failed Trades", reviewed trading trends during the period of May 1, 2007 to September 30, 2008 with a particular focus on short selling and failed trades. The study found that despite the fact that the average number of daily trades increased "significantly" during the study period, "there was no significant change" with respect to short sales.
The second study released was the "Study on the Impact of the Prohibition on the Short Sale of Inter-Listed Financial Sector Issuers". The purpose of this study was to review the impact of recent restrictions by the OSC in September and October of 2008 (see below) to curb short selling in the face of increased market volatility. Notably, the study found that the OSC Orders "did not appear to have had any appreciable effect on the price of securities" of either the securities of restricted or non-restricted financial issuers. The Orders, however, had "a significant impact on market quality" for the trading of restricted financial securities, as the Orders reduced the liquidity available in the restricted financials and increased the spread between the ask price and closing bid.
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Posted on January 30, 2009
First Policy Statements Published
Alix d'Anglejan-Chatillon | PDF Version | Version française
As a follow-up to the recent announcement by the Quebec Government on the coming into force of the new Derivatives Act (the “QDA” or “Act”) on February 1, 2009, the Autorité des marchés financiers (the “AMF”, Quebec’s financial services regulator) issued a press release on January 26, 2009 to announce a series of important transitional measures. The coming-into-force documents published by the AMF also include three policy statements relating to the definition of “accredited counterparties”, the characterization of “hybrid instruments” and self-certification of rules made by “recognized regulated entities”.
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Posted on January 21, 2009
No transitional relief issued to date
Alix d'Anglejan-Chatillon | PDF Version | Version française
The Quebec Government has proclaimed the Derivatives Act (QDA) in force as of February 1, 2009. The Act had received royal assent on June 20 2008.
The QDA is the first comprehensive standalone derivatives legislation to be adopted in Canada. The Act regulates both over-the-counter (OTC) and exchange-traded derivatives, subject to certain carve outs for OTC derivatives activities involving “accredited counterparties” and in other cases to be specified by regulation. An earlier post regarding the adoption of the QDA can be found here.
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Posted on November 28, 2008
The CSA have announced that they are extending the time for public comment on their consultation paper regarding the effects of recent credit market turmoil on ABCP markets in Canada to February 16, 2009. For more information on the consultation paper, see our post of October 6, 2008. The comment period was originally set to expire on December 20, 2008.
Posted on November 18, 2008
On November 14, 2008, the President’s Working Group on Financial Markets (PWG) announced a number of initiatives intended to provide regulatory oversight and prudent management of the over-the-counter derivatives market in the U.S. These initiatives include the implementation of central counterparty services for credit default swaps and the signing of a Memorandum of Understanding between the Federal Reserve, SEC and the Commodity Futures Trading Commission with respect to information sharing and consultation regarding CDS central counterparties issues. The PWG also announced a set of policy objectives to “guide efforts to address challenges associated with OTC derivatives.”
Posted on November 13, 2008
The Department of Finance has now released the terms of the Canadian Lenders Assurance Facility. For more information on the Facility, see our post of October 23, 2008.
Posted on November 12, 2008
Lewis Smith and Justin Parappally | PDF Version
The Government of Canada has introduced new measures to provide liquidity to Canadian financial institutions. Earlier measures are described in this post of October 23.
Today, the Ministry of Finance advised that the mortgage-backed securities purchase program announced previously will be increased from $25 billion to $75 billion. $12 billion in purchases have already been made from the first tranche of the purchase program, with an additional $7 billion expected to be purchased in an auction taking place today. The final purchases from the first tranche are expected to take place on November 21.
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Posted on November 12, 2008
This morning, the Department of Finance announced a plan to add up to $50 billion to its Insured Mortgage Purchase Program. The additional investment brings the maximum value of securities purchased through the CMHC to $75 billion. Meanwhile, the base commercial pricing of the recently-announced Canadian Lenders Assurance Facility will drop by 25 basis points and the 25 basis point surcharge for insurance will also be waived until further notice. The latter changes are intended to make the Facility “more competitive with similar programs offered in other countries.”
Posted on November 6, 2008
Following the completion of its recent testing phase, Alpha Trading Systems (Alpha), a Canadian alternative trading system (ATS) has announced that it will formally launch on November 7, 2008. Owned by nine major Canadian financial institutions, Alpha will operate as a visible continuous auction market and initially support trading of ten TSX-listed securities. Its stated objective, however, is to have all TSX and TSXV-listed securities available for trading on its platform by the end of the first quarter of 2009.
Alpha is the latest new marketplace to join the Canadian landscape, which also includes Pure Trading, Omega ATS, Chi-X Canada and Blockbook.
Posted on October 28, 2008
In response to the CSA's proposed amendments to NI 23-101 Trading Rules, released earlier this month, IIROC has now published for comment proposed amendments to the Universal Market Integrity Rules that would correspond to the changes to NI 23-101. IIROC's proposed amendments would include repealing the rule and policies respecting the "best price" obligation concurrent with the implementation of trade-through protection. With the publication of the proposed amendments, IIROC also withdrew from further consideration interim provisions on trade-through obligations, previously published by Market Regulation Services (a predecessor to IIROC). Until the amendments implementing trade-through protection are made to NI 23-101 and UMIR, however, Participants remain subject to the "best price" obligation under Rule 5.2 of UMIR.
Posted on October 23, 2008
In response to the recent turmoil in global markets, Canadian Minister of Finance Jim Flaherty announced this morning the creation of the Canadian Lenders Assurance Facility. The facility, to commence in November and run for six months, will offer insurance on the wholesale term borrowing of federally regulated deposit-taking institutions. Insurance will be available on certain debt issues with a term to maturity of at least three months. The stated intention of the initiative is to ensure that Canadian financial institutions "are not put at a competitive disadvantage when raising funds in wholesale markets given similar actions recently announced by other countries."
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Posted on October 17, 2008
The CSA have published proposed amendments to National Instrument 21-101 Marketplace Operation (NI 21-101) and National Instrument 23-101 Trading Rules (NI 23-101) (the ATS Rules) (and their related companion policies) for comment and review. The proposed amendments include proposals for a framework to implement trade-through protection that will require all visible, immediately accessible, better-priced limit orders to be filled before other limit orders at inferior prices, regardless of the marketplace where the order is entered. Other amendments relate to clock synchronization, technology requirements for marketplaces, information processor requirements, and best execution reporting requirements.These proposed amendments on trade-trough protection have been developed further to the discussion paper published by the CSA on July 22, 2005, entitled CSA Discussion Paper 23-403 Market Structure Developments and Trade-through Obligations and the Joint Notice on Trade-Through, Best Execution and Access to Marketplaces published by the CSA in conjunction with RS (now IIROC) on April 20, 2007. Comments on these proposed amendments will be accepted until January 15, 2009.
Posted on October 17, 2008
In addition to its ABCP study, IIROC has also published for comment a draft guidance note entitled "Best practices for product due diligence". Specifically, IIROC is requesting comment on the relevant criteria in determining whether a product should be subject to a due diligence review, factors to be considered in conducting product due diligence and the structures and procedures necessary for an effective review.
Posted on October 17, 2008
On October 17, the Investment Industry Regulatory Organization of Canada (IIROC) announced the publication of a study concerning the manufacture and distribution of third-party asset-backed commercial paper in Canada. The study reviews the events leading up to the "liquidity crisis" of August 2007 in the ABCP market and includes recommendations concerning product due diligence, product transparency, conflicts of interest and credit ratings.
Posted on October 16, 2008
In June, the BCSC imposed Conditions of Registration for B.C. investment dealers that trade in securities of over-the-counter (OTC) issuers through a B.C. office. Investment dealers that trade in American OTC markets must complete and file Form B, which records the information required under the conditions, within 30 days of the end of each calendar quarter.
The conditions expire on December 31, 2011.
Posted on October 16, 2008
On October 15, 2008, IIROC published a notice regarding the approval of amendments to the Universal Market Integrity Rules respecting short sales and failed trades. The amendments are based on an earlier notice, published in September 2007, and are intended to address potential abusive short selling and failed trade activity. These amendments will require reporting of failed trades after 10 trading days, limit the ability to cancel or vary executed trades, and allow IIROC to designate certain securities as ineligible for short sales entirely. They are also expected to involve the imposition of hard “pre-borrow” requirements in the case of persons who have executed failed trades, which will be subject to a request for comments. IIROC also announced that it is deferring adopting the removal of current short sale price restrictions and the removal of current requirements to file bi-monthly aggregate short position reports.
Posted on October 16, 2008
On October 9, 2008, the Alberta Securities Commission announced that it was granting recognition to the Natural Gas Exchange (NGX) to operate as an Exchange and Clearing Agency. Wholly owned by TMX Group, the NGX is based in Calgary and operates an energy exchange and a physical clearning and settlement facility for natural gas and electricity contracts.
Posted on October 7, 2008
In response to last week's OSC Extension Order with regards to the prohibition on the short sale of certain TSX-listed financial companies, IIROC has published guidance on the handling of short sales.
Posted on October 6, 2008
PDF Version
On October 6, 2008 the Canadian Securities Administrators (the CSA) published CSA Consultation Paper 11-405 entitled “Securities Regulatory Proposals Stemming from the 2007 – 08 Credit Market Turmoil and its effect on the ABCP Markets in Canada” (the Consultation Paper). The Consultation Paper is divided into two parts, with the first part providing a narrative overview of the background to the credit market turmoil in the United States, its spread into Canada and its impact on the non-bank sponsored portion of the asset-backed commercial paper (ABCP) market in Canada. The second part of the paper sets out proposals made under the Concept Paper to deal with the credit market turmoil and related issues in Canada.
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Posted on October 3, 2008
Today, the OSC extended its prohibition on short sales of certain TSX-listed financial companies that are interlisted in the U.S. or have outstanding securities that are interchangeable into shares of a financial company listed in the similar SEC Order. The prohibition expires on October 8, 2008, which corresponds to the expiration of the SEC Order, now that the "bailout" bill has been signed. The original Temporary Order, implemented September 19 and amended on September 22, was set to expire today.
Posted on October 3, 2008
The SEC announced yesterday that it was extending the Emergency Order of September 18 prohibiting the short selling of financial institutions. The Order was set to end at the end of the day on October 2nd, but considering the current state of the market, the SEC decided to extend the Order until the earlier of either the President's signing of the market "bailout" bill or 11:59 p.m. on October 17th, 2008.
Posted on October 2, 2008
The SEC has also extended its Emergency Order of September 17, 2008, which banned "naked" short selling. The Order was set to expire at the end of day October 1, but has now been extended to 11:59 p.m. on October 17, 2008. In the press release accompanying the extension Order, the SEC also communicated that the temporary reporting requirements regarding new short sales and the penalties for violations will extend beyond the above date in the form of an interim final rule.
Posted on October 2, 2008
On October 1, the SEC announced that it is extending its Emergency Order of September 18 temporarily broadening the safe harbour from liability for issuers repurchasing securities. The extended Order will now terminate at 11:59 p.m. on October 17, 2008.
Update: The TSX has taken a similar course of action, extending its previous notice to October 17.
Posted on September 23, 2008
On September 22, the OSC issued an amended Temporary Order with respect to the restrictions on short sales in order to address technical and operational matters originating from their original Temporary Order and to support similar issues addressed by the SEC.
Further, IIROC has released a Restated Reminder Respecting Obligations in the Conduct of Short Sales in order to review the obligations of Participants and Access Persons in the handling of short sales. Of interest, the reminder also states that as part of its market activity monitoring, IIROC intends to increase surveillance of short selling activity, in particular of issuers in the financial sector not covered by the OSC's Temporary Order.
Posted on September 22, 2008
On September 19, the OSC issued a Temporary Order to restrict short selling in certain TSX-listed financial companies that are interlisted in the U.S. or have outstanding securities that are interchangeable into shares of a financial company listed in last week's SEC Order. The OSC's order is intended "to prevent regulatory arbitrage with respect to short selling in Ontario of...and promote fair and orderly markets in Ontario for" the relevant securities. Unless extended, the Temporary Order will expire on October 3, 2008.
Posted on September 18, 2008
The U.S. SEC has recently issued new rules, effective September 18, which require short sellers and broker-dealers to deliver securities by the close of business on the settlement date. A broker-dealer in violation of the close-out requirement will be forced to locate and pre-borrow securities for future short sales in the same security. The SEC took action due to its concern "about the possible unnecessary or artificial price movements based on unfounded rumors regarding the stability of financial institutions and other issuers exacerbated by 'naked' short selling."
Posted on September 9, 2008
IIROC has approved amendments to Dealer Member Rules 100.2, 100.2(j) – Interest Rate Swaps and 100.2(k) – Total Performance Swaps in order to clarify the margin requirements for swaps where the counterparty is a regulated entity. The amendments were approved by the IDA Board of Directors on December 12, 2007 and took effect September 8, 2008.
Posted on September 8, 2008
On August 12, 2008, the Minister of Finance approved amendments to NI 21-101 and NI 23-101, which are set to come into force on September 12, 2008. As described in our earlier post, the CSA initially approved amendments to NI 21-101 Marketplace Operation (NI 21-101) and NI 23-101 Trading Rules (NI 23-101) in June 2008 to deal mostly with the best execution obligation of dealers and advisers. An unofficial consolidation of the amendments can be found here.
Posted on August 29, 2008
On Friday, the CSA published CSA Notice 46-305 Second Update on Principal Protected Notes. The purpose of this notice is to provide an update on the CSA’s review of PPNs and the recent coming into force of federal regulation applicable to PPNs (the “Federal PPN Regulations”).
The CSA are of the view that the Federal PPN Regulations, together with the CSA’s continuing regulatory initiatives and discussions with IIROC and the MFDA, will substantially address the CSA’s key concerns with PPNs, which were identified in CSA Notice 46-303.
Posted on August 28, 2008
Sterling H. Dietze
An Act respecting the transfer of securities and the establishment of security entitlements (the Quebec STA) received Royal Assent on June 20, 2008 and will come into force on January 1, 2009. The adopted legislation differs from Bill 47 as initially introduced in the National Assembly and upon which we commented in December 2007.
The Quebec STA seeks to implement the principles of the Uniform Securities Transfer Act, while harmonizing Quebec's rules with the securities transfer legislation of other provinces. The concepts found in the Quebec STA follow the model of the USTA and Article 8 of the U.S. Uniform Commercial Code (including the companion provisions of UCC Article 9). The Quebec STA introduces or formalizes into Quebec law concepts such as adverse claims, securities intermediaries, security entitlements, entitlement holders, securities accounts, financial assets, control and protected purchasers.
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Posted on August 13, 2008
In a press release dated August 13, 2008, the U.S. SEC announced that it was publishing for comment an agreement among self-regulatory organizations intended to improve the surveillance and detection of insider trading. The agreement seeks to better protect investors and improve market integrity by reallocating regulatory responsibility in order to eliminate duplication and gaps in surveillance among equity markets.
Posted on June 26, 2008
Philip Henderson
On June 11, 2008, the federal government published the new Principal Protected Notes Regulations (the Regulations), which are intended to come into force on July 1, 2008. The Regulations were introduced in response to the growing variety and complexity of principal protected notes (PPNs) currently being offered by financial institutions and build on the existing Index-linked Deposits Interest Disclosure Regulations, which will be repealed with the adoption of the new Regulations. The new requirements seek to ensure that investors in PPNs are adequately informed by improving the manner, content and timing of disclosure for these types of investments.
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Posted on June 24, 2008
The CSA have approved amendments to NI 21-101 Marketplace Operation (NI 21-101) and and NI 23-101 Trading Rules (NI 23-101) to deal mostly with the best execution obligation of dealers and advisers.
The Amendments, now scheduled to come into force on September 12, 2008, were initially published for comment along with other proposed amendments on April 20, 2007 with the Joint Notice on Trade-Through, Best Execution and Access to Marketplaces (originally published in conjunction with RS, now IIROC. The CSA have now decided to separate these three topics and deal with each separately on separate timetables.
The current amendments deal with best execution along with some other minor changes, including changes related to the electronic audit trail provisions. Amendments dealing with trade-through protection and rules related to access to marketplaces are proposed to be dealt with under separate requests for comment in the coming months.
Posted on June 18, 2008
Alix d'Anglejan-Chatillon and Jason Streicher | Version française
On May 30, 2008, the Montréal Climate Exchange (MCeX) officially launched the trading of a futures contract on Canada carbon dioxide equivalent (CO2e) units.
As was noted by MCeX chairman Luc Bertrand at the official launch ceremony, "the listing of the MCeX futures contract is a 'first' and it makes the Montréal Climate Exchange the first regulated environmental market in Canada." The MCeX is a joint venture between the TMX Group's Montréal Exchange (MX) (the Canadian derivatives exchange) and the Chicago Climate Exchange® (CCX), which operates the world's first greenhouse gas (GHG) emissions reduction and trading system. The launch of the MCeX is intended, in the words of CCX Chairman and Founder Richard Sandor, to position Canada "at the forefront of environmental finance and integrated emissions trading."
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Posted on June 10, 2008
Ralph A. Hipsher and Kenneth G. Ottenbreit | Version française
The Ontario Securities Commission has recently granted relief to dealers distributing foreign securities by way of private placement into Canada to address uncertainties caused by new forward-looking information disclosure requirements.
Effective December 31, 2007, the Canadian Securities Administrators (CSA) made significant amendments to forward-looking information disclosure requirements under continuous disclosure rules applicable to Canadian reporting issuers. The Ontario Securities Commission (OSC) also concurrently amended requirements relating to offering memoranda disclosure contained in OSC Rule 45-501. As a result of these amendments to OSC Rule 45-501, any offering memorandum provided to purchasers in Ontario that contains material forward-looking information (including future-oriented financial information and financial outlooks) is required to also contain certain prescribed forward-looking information disclaimers or safe-harbour type of disclosure. While this disclosure is similar to safe-harbour disclosure provided under U.S. or foreign securities law requirements, it also requires the issuer to address additional matters not typically encompassed by the equivalent non-Canadian disclosure.
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Posted on June 9, 2008
The OSC has approved amendments to NI 24-101 to further extend the phased-in transition periods under that Instrument. Under this extension, the deadline for registrants to comply with the matching deadline of midnight on T has been extended to July 1, 2010 and other transitional phase-in periods have been extended by another 24 months.
Posted on May 20, 2008
Kenneth G. Ottenbreit, Ralph A. Hipsher and Terence W. Doherty | Version française
On February 29, 2008, the Canadian Securities Administrators (CSA) published their revised proposals on National Instrument 31-103 Registration Requirements ("the Instrument"), relating to registration requirements for dealers, advisers and investment fund managers. The proposed registration reforms represent a major restructuring of the Canadian dealer, adviser and investment fund manager registration rules and have implications for non-Canadian dealers, advisers and investment fund managers doing business on a registered or exempt basis in any province or territory of Canada.
The Instrument is intended to create a streamlined and harmonized approach to the regulation of investment activities across Canada. Canada does not have a national or federal securities regulator; securities activities are regulated by Canada's thirteen provincial and territorial securities regulators (the CSA is their umbrella organization).
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Posted on April 17, 2008
Alix d'Anglejan-Chatillon and Sterling H. Dietze| Version française
A legislative proposal to establish a new Derivatives Act was tabled by the Québec Minister of Finance on April 9, 2008. Bill 77 follows the publication in August 2007 by the Autorité des marchés financiers (Québec's financial markets regulator) of a proposed framework for the regulation of the derivatives markets in Québec and an earlier concept paper in May 2006, both of which attracted detailed comments by Canadian and foreign stakeholders in the industry. The proposed Québec Derivatives Act would regulate both over-the-counter (OTC) and exchange-traded derivatives in standalone legislation, subject to certain carve outs for OTC derivatives activities involving designated "accredited counterparties".
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Posted on March 19, 2008
Alix d'Anglejan-Chatillon, Jennifer Northcote and Kenneth G. Ottenbreit | Version française
On February 29, 2008, the Canadian Securities Administrators (CSA) published their revised proposals relating to national registration requirements for dealers, advisers and investment fund managers. Over 260 comment letters were received on the original proposals (published in February of 2007). These proposals constitute an overhaul of registration requirements and registration exempt activities, and are intended to present a streamlined and harmonized approach to the regulation of investment activities across Canada. The revised proposals are open for comments until May 29, 2008.
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Posted on January 28, 2008
Jennifer Northcote and Alex Colangelo
On January 11, 2008, the Canadian Securities Administrators (CSA) published a revised version of National Instrument 23-102 Use of Client Brokerage Commissions as Payment for Order Execution Services or Research Services (the Instrument) as well as Companion Policy 23-102 CP (the Policy). The Instrument and Policy were originally published in July 2006 (the 2006 Instrument and Policy) [See Stikeman Elliott Securities Law Update of August 2006]. In response to numerous comments received, the CSA has made substantive amendments to the 2006 Instrument and Policy by limiting the application of the Instrument, broadening the definition of permitted services that may be paid for by soft dollars and relaxing the disclosure requirements.
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Posted on December 7, 2007
New rules largely consistent with other jurisdictions
Brian G. Hansen and
Ralph A. Hipsher
In Canada, disclosure of forward-looking information (FLI) (including disclosure of future-oriented financial information (FOFI) and financial outlooks) has been governed by the somewhat outdated and imprecise National Policy 48 (NP 48). Effective December 31, 2007, the Canadian Securities Administrators (CSA) will be revoking NP 48 and replacing it with harmonized national rules in the form of amendments to National Instrument 51-102 Continuous Disclosure (NI 51-102).
These amendments to NI 51-102 will apply to all disclosure of FLI and will primarily govern disclosure of FLI by entities that are "reporting issuers" in a Canadian jurisdiction. Notably, however, disclosure of FLI contained in prospectuses, rights offering circulars and offering memoranda issued by non-reporting issuers will also be subject to these requirements. While many non-reporting issuers may not previously have been subject to NP 48, there has long been some confusion about its application and breadth. The clear and concise requirements of the proposed amendments are therefore a welcome development, particularly as they largely reflect similar disclosure requirements in other jurisdictions.
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Posted on December 1, 2007
On November 24, 2007, Canada's federal Department of Finance announced proposed new regulations under the Bank Act, Cooperative Credit Associations Act and Trust and Loan Companies Act that will apply to Principal Protected Notes (PPNs). As reported in the Canada Gazette, the new regulations would define PPNs and specify "the content, manner and timing of disclosure that federally regulated deposit-taking institutions are required to provide at the point of sale for various sales channels" as well as other consumer-related requirements. The proposal is part of the federal government's "Advantage Canada" competitiveness program, designed to promote flexible outcomes-focussed approaches to regulation in response to rapid developments in global financial markets. Those wishing to comment have 30 days from the date of publication to respond.
The draft regulation is available online in the Canada Gazette, Part I for November 24, 2007, beginning on page 3279.
Posted on October 11, 2007
Posted with permission and appears in Euromoney's Global Banking & Financial Policy Review 2006/2007
Sherry Roth and
D'Arcy Nordick
The maple bond market in Canada evolved as a result of changes announced in the February 2005 Canadian Federal Budget removing the "foreign property limit" that restricted Canadian institutional and individual investors in tax deferred investments (including pension and retirement funds) to holding no more than 30% of total assets in foreign securities. Since then, the maple bond market has been accessed by numerous foreign debt issuers, and some domestic Canadian issuers, using existing debt issuance programmes.
PDF version of entire article
Posted on September 14, 2007
Daniella Laise and Jennifer Northcote
This is a reminder that the deadline for compliance with the first phase of National Instrument 24-101 - Institutional Trade Matching and Settlement (NI 24-101) is just around the corner, with certain provisions of the instrument coming into force on October 1, 2007.
NI 24-101 requires that all participants involved in institutional trades (which includes investment advisers, investment dealers and custodians) make changes to their trade order management systems and operational processes to meet the timing and performance objectives set out in NI 24-101 to achieve trade-matching by the end of business on trade date (T).
NI 24-101 adopts a phased-in approach, setting out progressive trade-matching milestones, with the expectation that matching institutional trades by the end of T will be achieved by July 1, 2008.
As part of the initial phase-in of NI 24-101, compliance with the following is required by no later than October 1, 2007:
- Trade-matching parties are to adopt and enforce policies and procedures designed to achieve matching as soon as practical after an institutional trade is executed;
- Registered dealers and advisers will be prohibited from accepting or giving orders to execute DAP or RAP on behalf of an institutional investor unless each trade-matching party has either entered into a trade-matching agreement or provided a trade-matching statement containing assurances that they have established and enforce policies and procedures to meet the requirements of NI 24-101;
- Exception reporting requirements are triggered if less than 80% of institutional trades are matched by noon on T + 1.
For additional information and compliance deadlines, please see this update.
See also CSA Staff Notice 24-305 issued December 14, 2007 for answers to frequently asked questions on NI 24-101.
Posted on June 8, 2007
NI 24-101 IMPORTANT DATES
- Trade-matching agreements or written statements are to be in place by October 1, 2007.
- Progressive trade-matching milestones begin on October 1, 2007, when 80 % of institutional trades must be matched by noon on T+1.
- By January 1, 2010, 95% of all trades must be matched on T.
National Instrument 24-101 - Institutional trade matching and settlement (Instrument), which came into force on April 1, 2007, represents the first step in an initiative to implement straight-through processing (STP) for institutional trades. The new regime will require all participants in institutional trades (which includes investment advisers, investment dealers and custodians) to make changes to their trade order management systems and operational processes to meet the timing and performance objectives set out in the Instrument to achieve trade matching by the end of business on trade date (T).
In establishing a framework for achieving STP, the Instrument introduces a timeframe under which all details for the accurate clearing and settlement of an institutional trade must be agreed, confirmed and verified by and between the adviser, dealer and custodian ("matching"). All participants in institutional trades will be required to adopt policies and procedures on how they propose to meet the prescribed progressive trade-matching milestones and deadlines, and the Instrument also requires exception reporting for registrants who fail to meet prescribed trade-matching rate targets within specified periods (with the target being a 95% matching rate on T by January 1, 2010).
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Posted on July 18, 2006
OSC Staff Notice 55-701 sheds light on the circumstances in which the purchase or disposition of securities under pre-arranged structured sales or acquisition plans by an insider do not constitute illegal insider trading.
On June 2, 2006 the Ontario Securities Commission (the "OSC") released OSC Staff Notice 55-701 - Automatic Securities Disposition Plans and Automatic Securities Purchase Plans (the "Staff Notice"), addressing frequently asked questions concerning the exemption from insider trading and insider reporting for acquisitions and dispositions of securities under certain types of automatic disposition or purchase plans in Ontario.
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Posted on November 18, 2005
CDS Declines to Accept Legended Securities in the Book-Entry System
With the coming into force of National Instrument 45-106 -
Prospectus and Registration Exemptions(NI 45-106)
, the Canadian Securities Administrators (CSA) also adopted a number of consequential amendments to various related policies and instruments. These included consequential amendments to Multilateral Instrument 45-102 -
Resale of Securities (now National Instrument 45-102 or NI 45-102).
Under NI 45-102, the first sale of securities issued in reliance upon certain private placement exemptions is considered to be a distribution (i.e. generally requiring a prospectus), unless certain prescribed conditions are satisfied. One of these conditions is that the certificate representing the security carries a legend indicating that the securityholder may not sell the security until the later of four months and a day after the acquisition date or the date the issuer becomes a reporting issuer. This requirement was amended, effective March 30, 2004 to respond to the increased use of book-entry-only securities. Since the time of this amendment, subsection 2.5(2)3 of NI 45-102 has required that the certificate representing the security, or an ownership statement issued under a direct registration system or other electronic book-entry system, carry the prescribed legend. Section 1.7 of the Companion Policy to NI 45-102 (the Companion Policy) stated (prior to the implementation of the amendment discussed below) that "[i]nvestors may receive either a paper certificate representing their security or an electronic alternative such as an ownership statement under a direct registration system."
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Posted on September 18, 2005
On Friday, August 26, the Canadian Securities Administrators (CSA) issued Staff Notice 41-304 - Income trusts: prospectus disclosure of distributable cash. The Notice is intended to provide additional guidance on the CSA's expectations about the nature and extent of estimated distributable cash disclosure in prospectuses.
Most income trust issuers present information about estimated distributable cash (or distributable income) in their prospectuses, as this often forms the basis upon which an income trust is valued in connection with its initial public offering. These estimates are usually based on trailing 12-month net income, adjusted for interest expenses, taxes, depreciation and amortization (EBITDA). EBITDA is usually further adjusted for certain additional items, ranging from non-recurring historical items to normalizing the effect of a recent or prospective acquisition, in order to arrive at distributable cash. The specific adjustments, as well as the level of explanatory disclosure provided in prospectuses concerning these various adjustments, generally vary from issuer to issuer.
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Posted on May 18, 2005
Rule 48-501 replaces OSC Policy 5.1 paragraph 26 and OSC Policy 62-601
Ontario Securities Commission Rule 48-501 -
Trading during Distributions, Formal Bids and Share Exchange Transactions (Rule 48-501) was approved by the OSC on February 15, 2005 and came into force on May 9, 2005. Rule 48-501 replaces OSC Policy 5.1 paragraph 26 and OSC Policy 62-601.
Rule 48-501, which has been harmonized with the Universal Market Integrity Rules amendments of Market Regulations Services Inc., imposes trading restrictions on dealers, issuers and certain related parties involved in the distribution of securities, take-over bids, amalgamations and issuer bids. The objective of Rule 48-501 is to reduce the possibility of price manipulation by those with an interest in the outcome of a distribution of securities or other transaction. Rule 48-501 also attempts, to the extent possible, to impose trading restrictions that are consistent with those imposed by the United States Securities and Exchange Commission's Regulation M.
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Posted on February 17, 2005
Members of the Canadian Securities Administrators (CSA) recently published for comment proposed National Instrument 45-106 - Prospectus and Registration Exemptions (the Instrument).
Substance and Purpose
The Instrument is intended to:
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consolidate and harmonize the prospectus and registration exemptions contained in various provincial statutes and national, multilateral and local instruments, and the disclosure and filing requirements associated with those exemptions, into a single national instrument;
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repeal or make consequential amendments to a number of national and multilateral instruments;
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modify the existing exemptions to make them more concise and consistent; and
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create new exemptions for relatively routine exemptive relief applications.
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Posted on January 17, 2005
Back in 2000, the Canadian Securities Administrators (CSA) published a concept proposal for an integrated disclosure system (IDS) to streamline the prospectus offering system. The proposal was premised in part on enhanced continuous disclosure requirements, which are now in force via
NI 51-102 (and, soon,
NI 81-106 for investment funds). Accordingly, the CSA are now proposing amendments to the short-form, shelf, and post-receipt pricing rules, among others, to simplify and broaden the short-form prospectus system. Comments are due by April 8, 2005, and implementation is being targeted for July 2005.
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