The Investment Industry Regulatory Organization of Canada Monday issued final guidance on the rules around firms guaranteeing prices on a client order.
In a new rule notice, IIROC provides guidance to firms on the conditions that apply, and the procedures that must be followed, for firms that wish to: guarantee the execution of a client order at a price to be determined by reference to a benchmark event that will occur later in the trading day; enter into a profit sharing agreement with a client if the firm, as a result of its hedging activities related specifically to the client’s order, ‘outperforms’ the guaranteed price; or, guarantee a rate of ‘outperformance’, when the amount of outperformance is either minor, or is based on the firm’s demonstrated ability to outperform the benchmark.
In terms of profit sharing, the guidance indicates that IIROC would consider it reasonable for firms to share up to 50% of the profits earned through hedging activities, related directly to a guaranteed price. It says it’s also prepared to accept that a firm may guarantee outperformance up to the greater of: 50% of its historical realized outperformance of the same benchmark over the prior calendar quarter; or, 25 basis points.
It also notes that when agreeing to guarantee the price of a trade to a client, firms must provide written notice to IIROC; and these sorts of trades may require its prior approval in certain circumstances.
IIROC sought comments on draft guidance in this area back in July.
In addition to the final guidance published Monday, IIROC has also published a summary of the comments it received on its proposed guidance (including comments from BMO Capital Markets, CIBC World Markets, the Investment Industry Association of Canada, and Scotia Capital Inc.