Rules Notice
Guidance Note
UMIR
Contact:
Naomi Solomon
Senior Policy Counsel, Market Regulation Policy
Telephone: 416.646.7280
fax: 416.646.7265
e-mail: nsolomon@iiroc.ca
Please distribute internally to:
Institutional
Legal and Compliance
Retail
Operations
Senior Management
Trading Desk
14-0293
December 15, 2014
Guidance on the Definition of “Foreign Organized Regulated
Market”
Executive Summary
1
Under UMIR 6.4, a Participant may conduct certain trades of listed or quoted securities
outside of Canada if such trades are executed on a foreign organized regulated market
(“FORM”), which is a defined term in UMIR. Participants are reminded that if they execute
trades “off-marketplace” it must be in a manner that complies with UMIR 6.4; a Participant
that relies on the exemption under UMIR 6.4(2)(d) to execute trades “off-marketplace” must
execute the trades on a FORM.
Background
UMIR 6.4 provides that a Participant acting as principal or agent may not trade nor participate
in a trade in a security by means other than the entry of an order on a marketplace 2. The rule
1
“Listed security” is defined in UMIR as a security listed on an Exchange. “Exchange” is defined in UMIR as a person recognized by the
applicable securities regulatory authority under securities legislation to carry on business as an exchange. An “interlisted” security that is
listed on a foreign market and is also listed on an Exchange, is a “listed security” under UMIR. “Quoted security” is defined in UMIR as a
security quoted on a recognized quotation and trade reporting system (“QTRS”).
2
“Marketplace” is defined in UMIR as (a) an Exchange; (b) a QTRS; and (c) an ATS (which is defined as an alternative trading system in
National Instrument 21-101 - Marketplace Operation), and refers to a marketplace that is recognized by or registered with one or more
Canadian securities regulatory authorities.
includes a number of exceptions, including an exception for trades executed on a FORM 3.
UMIR defines FORM as a market outside of Canada:
(a)
that is an exchange, quotation or trade reporting system, alternative
trading system or similar facility recognized by or registered with a
securities regulatory authority that is an ordinary member of the
International Organization of Securities Commissions;
(b) on which the entry of orders and the execution or reporting of trades is
monitored for compliance with regulatory requirements at the time of
entry and execution or reporting by a self-regulatory organization
recognized by the securities regulatory authority or by the market if the
market has been empowered by the securities regulatory authority to
monitor the entry of orders and the execution or reporting of trades on
that market for compliance with regulatory requirements; and
(c)
that displays and provides timely information to information vendors,
information processors or persons providing similar functions respecting
the dissemination of data to market participants for that market of at least
the price, volume and security identifier of each trade at the time of
execution or reporting of the trade on that market,
but, for greater certainty, does not include a facility of a market to which trades
executed over-the-counter are reported unless:
(d) the trade is required to be reported and is reported to the market
forthwith following execution;
(e) at the time of the report, the trade is monitored for compliance with
securities regulatory requirements; and
(f)
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at the time of the report, timely information respecting the trade is
provided to information vendors, information processors or persons
See Rule 6.4(2)(d). Rule 6.4(3) qualifies that the exemption is unavailable to an order of a Canadian account denominated in Canadian
funds that: (a) is part of an intentional cross; (b) is part of a pre-arranged trade; (c) is for more than 50 standard trading units; or (d) has a
value of $250,000 or more if the entry of the order on a foreign organized regulated market would avoid execution against a better-priced
order entered on a marketplace pursuant to the Order Protection Rule. In addition, certain provisions of UMIR continue to apply to a
Participant entering the order, such as Rule 2.1 of UMIR which requires a Participant to transact business openly and fairly and in
accordance with just and equitable principles of trade when trading on a marketplace or trading or otherwise dealing in securities which
are eligible to be traded on a marketplace. (See also IIROC Notice 13-0275 Republication of Proposed Consolidation of IIROC Enforcement,
Procedural, Examination and Approval Rules issued November 14, 2013, which proposes to repeal Rule 2.1 of UMIR upon the introduction
of a consolidated Standards of Conduct Rule 1400 in conjunction with the Dealer Member Rules.) The exemption for an off-marketplace
trade involving a non-Canadian account provided in clause (e) of Rule 6.4(2) would not be available when trading with or on behalf of a
Canadian account.
IIROC Notice 14-0293 – Rules Notice – UMIR - Guidance Note – Guidance on the Definition of “Foreign Organized Regulated
Market”
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providing similar functions respecting the dissemination of data to market
participants for that market.
The FORM definition was implemented with the stated objective that trades conducted by a
Participant in a listed or quoted security outside of Canada should be conducted on a market
that has substantially the same regulatory monitoring and dissemination of data to the public
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as would be present if the trade had been conducted on a marketplace in Canada . IIROC
(then Regulation Services Inc.) also noted that “simple trade reporting facilities” were not
recognized by the CSA as marketplaces 5. IIROC’s views have not changed in this regard, and
the originally stated objective continues to be the policy objective underlying the FORM
definition.
Discussion
Market Registration
The FORM definition requires, among other things, that the market outside of Canada be
recognized by or registered with a securities regulatory authority that is an ordinary member
of the International Organization of Securities Commissions (“IOSCO”). This requirement is
indicative of the reliance on comity of securities regulatory standards among IOSCO
members. Market recognition or registration by an ordinary IOSCO member also provides the
IOSCO member with regulatory market information that can be shared with other regulators
for enforcement or other regulatory purposes.
Dealer registration is not equivalent to market registration. Broker-dealers in the U.S. that
“internalize” orders by matching them with their own inventory do not meet section (a) of the
FORM definition. A U.S. broker-dealer engaged in internalizing activity is not required to
register as an alternative trading system (“ATS”) and internalized over-the-counter (“OTC”)
trades are not recognized in the U.S. as being “within an ATS” for the purposes of reporting
ATS volume and trade count information for equity securities. 6 If a U.S. broker-dealer reports
a trade that it has internally matched to a trade reporting facility such as the OTC Reporting
Facility (“ORF”), the trade reporting facility alone does not meet the definition of FORM since
it is not a recognized or registered market pursuant to section (a) of the FORM definition.
4
See Market Integrity Notice 2008-008 – Amendment Approval – Provisions Respecting “Off-Marketplace” Trades (May 16, 2008). At the time
it was noted the FORM definition excluded the bulletin board then known as “Pink Sheets” as well as the OTC Bulletin Board outside of the
then NASD operating hours and certain reporting facilities then operated by Nasdaq and the NASD.
5
See Market Integrity Notice 2004-018 – Request for Comments – Provisions Respecting “Off-marketplace Trades” (August 20, 2004).
6
“ATS Transparency Data” is made publicly available on FINRA’s website, see: https://ats.finra.org/. Pursuant to FINRA Rule 4552 weekly
aggregated trade data is reported by ATSs and is available for all equities (NMS Tier 1, NMS Tier 2, and OTC Equities).
IIROC Notice 14-0293 – Rules Notice – UMIR - Guidance Note – Guidance on the Definition of “Foreign Organized Regulated
Market”
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Regulatory Reporting and Data Dissemination
Sections (a), (b) and (c) of the FORM definition apply in conjunction with each other such that
in addition to recognition or registration as a market as required under section (a), for a
market outside of Canada to qualify as a FORM, it must:
•
•
pursuant to section (b), monitor the entry of orders and the execution or
reporting of trades for compliance with regulatory requirements at the time of
entry and execution to enable the self-regulatory organization (“SRO”) or
market to monitor trades in “real-time”; and
pursuant to section (c), display and disseminate data regarding each trade at the
time of execution or reporting of the trade on that market so as to provide trade
information transparency.
In periods when the SRO is not monitoring trades reported to a trade reporting facility in “real
time”, section (b) of the FORM definition is not met.
Impact
Participants are reminded that if they execute trades “off-marketplace” it must be in a manner
that complies with UMIR 6.4. A Participant that routes orders of listed or quoted securities to a
U.S. broker-dealer or other foreign dealer for execution “off-marketplace” should review its
routing practices to ensure compliance with UMIR 6.4. A Participant that relies on the
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exemption under UMIR 6.4(2)(d) must execute the trades on a FORM . A listed security, to
which these requirements apply, includes an “interlisted” security that is listed on a foreign
market and is also listed on an Exchange.
7
Participants may refer to the SEC’s “ATS list” updated periodically at: http://www.sec.gov/foia/docs/atslist.htm.
IIROC Notice 14-0293 – Rules Notice – UMIR - Guidance Note – Guidance on the Definition of “Foreign Organized Regulated
Market”
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