The Canadian Securities Administrators are finally proposing to adopt rules to govern alternative trading systems.

The new rules will regulate all marketplaces operating in Canada, including exchanges, quotation and trade reporting systems and ATSs. All markets are subject to certain requirements, including information consolidation, market integration, reporting and record keeping requirements and systems capacity requirements.

A marketplace can choose one of three regulatory models under which to operate: to be a member of an exchange, to be regulated as an exchange, or to be regulated as an ATS.

The ATS Rules attempt to minimize fragmentation by setting out order and trade reporting requirements, information consolidation requirements and market integration requirements.

The CSA has determined at this time to restrict the securities that can be traded on an ATS to: exchange-traded securities, corporate debt securities, government debt securities and foreign exchange-traded securities. An inter-listed security is an exchange-traded security. A security that is traded on an exchange, but is not listed on that exchange, or is posted on an over-the-counter bulletin board (i.e., NasdaqÕs OTCBB) is not considered to be a foreign exchange-traded security and cannot be traded on an ATS. An ATS that wants to trade over-the-counter equity securities may apply to the CSA.

It has decided to postpone the implementation of data consolidation for exchange-traded securities and foreign exchange-traded securities for a period of about two years. The CSA will instead request that marketplaces and other industry participants develop and implement a solution to consolidate order and trade information for exchange-traded securities and foreign exchange-traded securities by December 31, 2003.

The CSA are imposing market integration requirements onto marketplaces in order to minimize any negative impact of having different marketplaces trading the same security. Because market integration is a complex task it has developed a two-phased approach. The first phase will continue until January 1, 2004 and will require that a marketplace establish an electronic connection to the principal market for each security traded on that marketplace before executing a trade in that security.

The second phase of market integration will begin on January 1, 2004. The second phase requires all marketplaces to establish an electronic connection to a market integrator or, if there is no market integrator, to establish an electronic connection to each other. The CSA will not mandate a specific method of achieving complete market integration. Instead, it plans to monitor the number of marketplaces that operate in Canada and whether they create electronic connections to each other. If the industry achieves complete market integration voluntarily, it may not be necessary to create a market
integrator.

The ATS rules were delivered to the Ontario Minister of Finance on August 17. If the Minister does not approve, reject or return the National Instrument by October 16, or if he approves it, the National Instrument will come into force on December 1.