Investor Alert:
CIRO is issuing a warning to Canadian investors regarding Canada Token Trade.
Effective Date: December 31, 2021
This Rules Notice provides guidance (Guidance) to Dealer Members (Dealers) on the supervision of order execution only (OEO) account1 activity given the additional risks associated with third-party electronic access to marketplaces when orders may not be directly handled by staff of the Dealer. This Guidance provides instruction on:
On November 13, 2014, IIROC published notice of the approval of amendments to UMIR and the Dealer Member Rules (Amendments) respecting OEO accounts as a form of third-party electronic access to marketplaces.2 These Amendments introduced a more comprehensive regulatory framework for OEO accounts, including:
An OEO Dealer, while not responsible for making suitability determinations for clients, must comply with all other applicable provisions of the IIROC Rules3 , including, but not limited to: sections 3240, 3926, 3927 and 3955.
An OEO Dealer is required to have written policies and procedures and systems of supervision and control in place to review client trading for all aspects of sections 3240 and 3955. The standards set out in section 3927 are the minimum requirements to supervise account activity and a Dealer is not precluded from establishing policies, procedures and systems of supervision and control that exceed the minimum standard where warranted by the business activities or offerings of the Dealer.
Dealers that maintain accounts for clients who meet the definition of “institutional client”4 must comply with the requirements set out in sections 3950 and 3951.
IIROC believes that orders entered by OEO account clients may pose additional risks to the integrity of the market and to the Dealer itself as a result of the direct nature of order entry by the client. In an OEO account, the limited ability for staff of the Dealer to directly handle orders eliminates a significant opportunity to identify potentially problematic orders or patterns prior to the entry of the order to a marketplace. Section 3955 requires an OEO Dealer to take into account the additional risks associated with the method of order entry and the absence of order handling by employees of the OEO Dealer. IIROC expects that an OEO Dealer’s policies and procedures and systems of supervision and control address these added risks.
The policies and procedures developed and implemented by the Dealer must be reasonably designed to ensure that the Dealer’s regulatory obligations are continually being met, including its client obligations and its obligations to the market generally.5
In terms of a Dealer’s obligations to the market, its policies and procedures must address its gatekeeping obligations, such as monitoring client account activity for orders and trades that may be harmful to the integrity of the market. This includes activity that is or may be considered manipulative and deceptive. Effective gatekeeping also includes reviewing for problematic account activities that cannot be easily detected by a single order or trade, but through the identification of patterns that may emerge over a period of time.
A Dealer’s policies, procedures and systems of supervision and control should be appropriate to the size and scope of the Dealer and the types of business conducted.
As part of its supervision obligation, a Dealer is expected to have policies and procedures in place that are reasonably designed to identify account activity that is or may be considered manipulative and deceptive. “Manipulative and Deceptive Activities” is defined in the IIROC Rules to mean:
“Any manipulative or deceptive methods, act or practice in connection with any order or trade on a marketplace, and includes the entry of an order or the execution of a trade that would create or could reasonably be expected to create:
IIROC is of the view that the policies and procedures developed by the Dealer should take into account higher risk activities and consider orders and trades that may pose heightened risks to market integrity. For example, an OEO Dealer must consider the heightened risks associated with the entry of orders that are not directly handled by staff of the Dealer. UMIR Policy 2.2 sets out a list of activities that may be considered manipulative and deceptive. These activities would similarly be considered Manipulative and Deceptive Activities under the IIROC Rules definition. These activities include:
IIROC previously issued guidance confirming IIROC’s position that certain trading strategies may be considered manipulative and deceptive for the purposes of UMIR7 . These strategies, which may similarly be considered manipulative and deceptive under the definition of Manipulative and Deceptive Activities in the IIROC Rules, include:
To assist IIROC in providing a consistent level of market surveillance of trading activity that may pose similar risks to market integrity as other forms of third-party electronic access to marketplaces, subsection 3241(6) requires that each order entered on a marketplace that retains IIROC as its regulation services provider (applicable marketplace) by or on behalf of: an “active” OEO account client, or an OEO account client that is not an individual and is registered as a dealer or adviser under applicable securities legislation or a dealer or adviser equivalent, contain the client ID that has been assigned to the client.
An “active” client is any OEO account client whose trading activity on applicable marketplaces exceeds a daily average of 500 orders per trading day in any calendar month. IIROC expects that an OEO Dealer will, on a monthly basis, review orders from the prior month to identify any clients that met the prescribed threshold in that month. Once a client has been identified, the OEO Dealer is expected to advise IIROC of the client ID and the name of the client associated with it. This information is required to be provided to IIROC under subsection 3241(5).
IIROC requires that a client ID also be applied to orders for any OEO account client that trades on an applicable marketplace that is not an individual and: (i) is registered as a dealer or adviser under applicable securities legislation; or (ii) is a dealer or adviser equivalent, regardless of the level of account activity. IIROC expects that OEO dealers will identify any such current clients and will advise IIROC of the client ID and the name of the client associated with it. IIROC must be advised of the client ID and name of each new client that is a non-individual and is registered as a dealer or adviser under applicable securities legislation or is a dealer or adviser equivalent upon the account being opened.
The following is a list of questions regarding OEO accounts as a form of third-party electronic access to marketplaces:
A Dealer should, on a monthly basis, review order activity from the previous month for client activity that meets the threshold at which the use of a client ID is required.
Once a client account has been identified that meets the threshold where the use of a client ID is required, the requirement to include the client ID on all subsequent orders sent to an applicable marketplace will continue to apply regardless of the future activity of that particular client account.
The calculation of order activity is based on the average number of orders sent to an applicable marketplace per trading day during the previous calendar month. For the purposes of calculation, the OEO Dealer must consider both original orders and any subsequent “CFOs”. For example, a client order to buy 100 shares of a security on an applicable marketplace would count as one order. If the client were to subsequently amend that order to a different limit price, the amendment to the order would be counted as a separate order. In this example, the original order and the amended order with the new limit price would be counted as two orders.
Order cancellations should be excluded from the calculation of order activity. Orders generated directly by an OEO Dealer's systems, such as by an OEO Dealer’s VWAP algorithm, should also be excluded from the calculation of order activity.
No. The principle underlying the use of client IDs for particular accounts is to address the potential heightened risks associated with the entry of orders where there is no intermediation by staff of the OEO Dealer. If an OEO Dealer’s practice includes the intermediation of client orders by registered staff of the OEO Dealer, those orders may be excluded from the “active client” calculation. IIROC would consider orders that are received either electronically or non-electronically by the OEO Dealer but are subject to review by registered staff of the OEO Dealer prior to routing to an applicable marketplace to be “directly handled by registered staff of the Dealer”.
Where an OEO Dealer’s practice includes the handling of orders on both an intermediated and non-intermediated basis and splitting the client’s order flow is not operationally practical, IIROC does not object to the OEO Dealer including all orders for purposes of determining client ID requirements.
No. If a client has more than one account with the same OEO Dealer, the OEO Dealer should consider the client’s activity at the account level only for the purposes of determining whether the active trading threshold has been met. The use of a client ID is only required for each account that on its own meets the threshold of an “active client”. All accounts of non-individuals registered as a dealer or an adviser under applicable securities legislation or a dealer or adviser equivalent are required to use a client ID, regardless of account activity.
No. The requirement to use a client identifier is based on the account itself and not based on trading authorization. An account opened in the name of a non-individual registered as a dealer or advisor registered under applicable securities legislation or dealer or advisor equivalent must always use a client ID regardless of client activity. All other accounts, including accounts that have granted trading authorization, would only require the use of a client ID when the average daily number of orders sent to an applicable marketplace for that particular account exceeds 500 in any one month.
Each Dealer’s supervision policies and procedures and systems of control should be appropriate for its size and business and be reasonably designed to prevent and detect violations of any requirement applicable to the Dealer’s business. An OEO Dealer should consider employing supervisory controls that have the ability to detect an offending order prior to such order being entered to a marketplace. To the extent that this is not possible, the OEO Dealer should, at a minimum, have sufficient pre- and post-trade compliance testing to address the added risks associated with orders entered by OEO account clients.
The ability to monitor trading on a “real-time” basis would be particularly helpful if additional monitoring of a specific client’s activity becomes necessary as a result of a regulatory request, or if the OEO Dealer itself determines that trading by a particular client requires additional monitoring.
Under IIROC Rule 3926 and IIROC Rule 3955, Dealer’s policies and procedures and systems of control should be designed to address the risks relevant to its business. Orders entered through OEO accounts may introduce additional risks to the Dealer and to the marketplace generally given the limited involvement of staff in the handling of client orders. To the extent that a Dealer does not have separate compliance testing and review standards for its OEO account business, it must ensure that its overall standards of compliance and supervision sufficiently address the heightened risks associated with OEO account order entry.
IIROC Rule 3955 requires that policies and procedures and systems of supervision and control take into account the risks associated with the method of OEO account order entry and the absence of intermediation by employees of the Dealer. Therefore compliance procedures for OEO accounts, at a minimum, should address:
This Rules Notice relates to the following UMIR and IIROC Rules:
This Rules Notice repeals and replaces the guidance set out in IIROC Notice 14-0264 – Guidance Respecting Order Execution Services as a Form of Third-Party Electronic Access to Marketplaces (November 13, 2014).
This Guidance Note was published under Notice 21-0190 - IIROC Rules, Form 1 and Guidance.