As part of an ongoing effort to address long-standing complaints about the rules that guard against abusive short-selling, the Canadian Investment Regulatory Organization (CIRO) is proposing rule changes that aim to bolster investor confidence by reducing failed trades, without adopting burdensome mandatory close-out requirements.
In a notice issued Thursday, the industry self-regulatory organization (SRO) announced that the Canadian Securities Administrators (CSA) have approved amendments to the trading rules and dealer rules that require dealers to “have a reasonable expectation to settle trades in listed securities,” along with an exception to that requirement. Those changes take effect on Aug. 11.
At the same time, CIRO is proposing new principles-based amendments that will require dealers to have policies and procedures in place to detect, and deal with, failures to deliver securities by clients that are engaged in short selling. However, it’s dropping an earlier proposal to adopt mandatory close-out requirements, which would force dealers to settle failed trades by buying or borrowing the necessary securities.
The proposals come as part of a multi-year effort to beef up the short-selling regime in Canada, which began with the Capital Markets Modernization Taskforce’s report in 2021 that called for reforms to modernize the short-selling requirements.
In 2022, a joint project between CIRO and the CSA was launched to explore measures to combat abusive short selling, including mandatory close-out requirements, and a joint working group was formed by the regulators in 2024.
“This work led to CIRO clarifying and strengthening the short selling framework under [the trading rules] with the adoption of a new positive requirement for [firms and traders] to have a reasonable expectation to settle on settlement date,” the SRO said — and in 2025, it proposed mandatory close-out requirements.
Now, CIRO has decided to drop the mandatory close-out policy. Instead, it’s proposing “a conduct-based approach that focuses on the investment dealer’s policies and procedures governing client delivery failures,” regardless of whether a settlement failure occurs.
The proposed new provision would apply to all investment dealers that sell listed securities on behalf of clients on a marketplace — requiring dealers to have policies and procedures to ensure that their clients deliver the shares by the intended settlement date, and to address any failures to deliver, unless the client can demonstrate that they’re “deemed to own” the security.
“By focusing on the conduct of the seller, the proposed amendments help ensure that clients deliver shares as expected,” even if there’s no settlement failure, the notice said.
Additionally, this approach will save dealers from having to identify individual failed trades following the settlement process, which some argued would be “an operationally challenging exercise” that requires systems changes and carries high implementation costs.
“The proposed amendments would establish a principles-based framework that moves away from a one-size-fits-all response to delivery failures,” it said. “Rather than prescribing the same regulatory consequence to every scenario, the proposed amendments permit investment dealers to take measures that would be appropriate for their business, taking into account the circumstances of the client and the particular failure to deliver at issue.”
The underlying goal of the proposal is to enhance investor confidence by reducing the frequency of client delivery failures that could undermine confidence in the integrity of markets, and raise concerns about abusive short-selling activity.
“Persistent client delivery failures may negatively affect shareholders and deter prospective investors by contributing to adverse perceptions of a security and the market more broadly,” the SRO’s notice said.
The proposals are out for comment until July 3.