From the Regulators

Proposals aim to ensure that third-party electronic access to marketplaces is subject to supervision and regulatory oversight

By James Langton |

The Investment Industry Regulatory Organization of Canada (IIROC) is proposing rule changes designed to ensure that active traders face the same level of oversight and regulatory scrutiny regardless of how they access the markets.

IIROC published revised proposals Thursday that aim to ensure that similar trading activity that occurs through different forms of third-party electronic access is subject to the same degree of supervision and regulatory oversight.

In its notice, IIROC says that the proposed amendments "are intended to build on the framework to regulate various forms of third-party electronic access to marketplaces and complement the provisions of [provincial rules] that deal with direct electronic access to marketplaces and the IIROC rules respecting third-party electronic access to marketplaces."

Currently, the identity of clients trading though order executive services (OES) accounts are not provided to IIROC. Yet, IIROC says that it believes that clients that trade actively through OES "may pose similar risks to market integrity as clients that trade though [direct access] or through a routing arrangement."

"Inconsistent levels of transparency of client identity to IIROC can result in an incomplete regulatory framework by enabling an active OES client to avoid the amount of regulatory oversight that would otherwise be applied to the client if trading through DEA or a routing arrangement," it notes.

In October last year IIROC first proposed amendments to help eliminate this unequal treatment. (See Investment Executive, IIROC to improve oversight of electronic trading, October 15, 2013.)

IIROC's revised proposal reflects the comments received on the initial amendments, along with subsequent discussions with both the industry and the provincial regulators.

In the revised proposal, IIROC indicates that the feedback it received on the original proposals generally focused on the use of client identifiers for OES accounts and the scope of the requirements.

Among other things, the revised proposal would require dealers providing order execution services to include client identifiers on the orders of certain active traders (defined as traders that make an average of 500 orders per trading day in any calendar month), and to provide IIROC with the identity of the client. The same requirements would also apply to foreign dealers as well. The proposal would also set supervision requirements for OES dealers to ensure that the added risks associated with the lack of intermediation by the dealer is addressed in their policies and procedures and systems of supervision and control.

IIROC notes that OES dealers will be impacted by the proposed amendments because they will be required to develop processes to cooly with the new order identification requirements. Additionally, participants that execute for OES dealers would be required to make changes to their systems to accommodate the use of client IDs.

Comments on the revised proposals, and revised guidance, are due by June 23, and IIROC indicates that it expects the new rules to take effect either 180 days after receiving approval from the provincial regulators, or on March 1, 2015 (whichever comes later).