Regulatory framework for
introducing broker /
carrying broker
arrangements
Background
• The current arrangement types had their
origins in 1995 when the TSE adopted
amendments to its existing introducing broker
/ carrying broker rules
• Prior to the introduction of these amendments
there was only one permitted IBCB arrangement
– the current Type 1 arrangement
• Each arrangement developed in 1995 included
combinations of some or all of the following
activities:
- Trade execution Trade settlement *
- Custody of cash *
Custody of
securities *
- Bookkeeping *
Financing of
Existing Arrangements
• Type 1 Arrangement
– Assumes there is no need for the
introducing broker to handle client cash
and securities
– Carrying broker (CB):
• Executes, clears and settles all firm
securities and financing trades and all
client securities trades
• Provides day to day financing of margin
lending to clients
• Monitors compliance with the client free
credit balance segregation requirements
• Monitors client account credit and
concentration risks
Existing Arrangements
• Type 1 Arrangement (con’t)
– Carrying broker (con’t):
• Holds client positions in segregation and
safekeeping, in accordance with SRO
requirements and client instructions
• Prepares trading and client account
related books and records
• Reports client account balances on Form 1
• Assumes responsibility (not sole
responsibility) for complying with all
regulatory requirements that apply to the
functions they are performing for the
introducing broker
Existing Arrangements
• Type 1 Arrangement (con’t)
– Introducing broker (IB):
• Has lower minimum capital and insurance
requirements because it is not handling
client cash and securities
• Posts a comfort deposit with the carrying
broker to cover client account losses for
which it is ultimately responsible
• May only enter into one IBCB arrangement1
and may not fully service any portion of
its business
1
An exception of made for arrangements involving futures
contracts and futures contract options
Existing Arrangements
• Type 1 Arrangement (con’t)
– Introducing broker (IB) (con’t):
• Retains responsibility for complying with
all regulatory requirements that are
otherwise the exclusive responsibility of
a full service dealer as follows:
– Where performance of the function is not
delegated to the CB, IB retains exclusive
responsibility
– Where performance of the function is
delegated to the CB, IB has
responsibility to monitor to ensure
delegated function is being properly
informed and must act to correct if it
becomes aware that the delegated function
Existing Arrangements
• Type 2 Arrangement
– Same features as the Type 1 Arrangement
except:
• IB can handle client cash and securities
on a limited basis - as a result, the IB
minimum capital and insurance
requirements are the same or similar to
that for a full service dealer
• IB has the option of executing its own
trades for those markets for which it is
a participating organization
Existing Arrangements
• Type 3 and 4 Arrangements
– Codification of arrangements that were
referred to as service arrangements prior
to 1995
– Same features as the Type 2 Arrangement
except:
• IB provides day to day financing of
margin lending to clients
• IB monitors client account credit and
concentration risks
• IB reports client account balances on
Form 1
• IB can enter into multiple IBCB
arrangements and may fully service any
Existing Arrangements
• Type 3 and 4 Arrangements (con’t)
– Same features except (con’t):
• In the case of Type 4, IB executes all of
its financing trades
Plain Language Rewrite
• As part of IIROC’s plain language rewrite
project the introducing broker / carrying
broker arrangement rules have been rewritten
and recently published for public comment
(Rules Notice 11-0061, February 11, 2011)
• Proposed new plain language Rule 2450,
Acceptable Back Office Arrangements, includes
the following proposed substantive revisions:
– Specific definitions for the terms
“clearing arrangement” and “introducing
broker / carrying broker arrangement”
– Specific restrictions on the multiple
arrangements that a Type 3 or 4 IB may
enter into
Plain Language Rewrite
• Proposed substantive revisions (con’t):
– Clarification of the margin requirements
to provided by the carrying broker; this
existing rule requires margin to be
provided but is silent on how it is to be
calculated
– Clarification of wording regarding
carrying broker requirement to report any
comfort deposits received as a liability
– Clarification of wording regarding
introducing broker insurance requirements
to make consistent with the current
requirements set out in Rule 400
Plain Language Rewrite
• Proposed substantive revisions (con’t):
– Clarification of the obligations of the IB
and CB to comply with IIROC rules an to
ensure that clients are properly served
– Revision of cash handling requirements to
prohibit the handling client cash in the
form of money
– Make consistent the notification
requirements when a CB wishes to use a
portion of the IB comfort deposit
Plain Language Rewrite
• Proposed substantive revisions (con’t):
– Executing foreign affiliate arrangements no
longer involves seeking an exemption
– Specifically stating that clearing
arrangements are not introducing broker /
carrying broker arrangement
– Streamlining of the IIROC approval process
for introducing broker / carrying broker
arrangements
– Specific exclusion of clearing
arrangements, as defined, from requiring
IIROC approval
Summary
Type 2 [Introduction Arrangement]
CB:
•Executes*, clears and settles all
trades
•Maintains custody of all client
cash and securities
•Prepares trading and client account
related books and records
•Provides day to day financing of
margin lending to clients
•Reports client account and other
related balances on Form 1
•Assumes responsibility for
complying with applicable regulatory
requirements
IB:
•May not enter into multiple
arrangements or fully service
portions of its business
•Retains non-financial client
service and regulatory obligations
to client
•Retains responsibility for
complying with all regulatory
Type 3 [Service Arrangement]
CB:
•Executes*, clears and settles all
trades
•Maintains custody of all client
cash and securities
•Prepares trading and client account
related books and records
•Assumes responsibility for
complying with applicable regulatory
requirements
IB:
•May enter into multiple
arrangements or fully service
portions of its business
•Provides day to day financing of
margin lending to clients
•Reports client account and other
related balances on Form 1
•Retains non-financial client
service and regulatory obligations
to client
•Retains responsibility for
complying with all regulatory