This Rules Notice provides guidance on:
- the procedures for the execution of a designated trade that involves a distribution to clients of a significant block of stock of a listed security
- how a Participant may seek an exemption under UMIR to allow the Participant to complete a take-on trade “off-marketplace” whereby the Participant, acting as principal, assumes the “economic risk” of the transaction with the intent to immediately attempt to distribute the stock to its clients.
The rationale for providing an exemption to allow Participants to complete a principal take-on trade off-marketplace is to replace the wide distribution rules of the TSX, which were repealed in 2008. At the time, the wide distribution procedures of the TSX were designed to facilitate the sale of a large block of stock by a Participant to its clients in an efficient manner.1
We are of the view that the efficient distribution of large blocks of stock continues to be a a beneficial outcome for our markets and warrants an exemption from UMIR under certain circumstances. As such, we may provide an exemption from UMIR 6.4(2)(b) to allow a Participant to complete a principal take-on trade “off-marketplace” if the trade is made in furtherance of a “distribution” to clients and the Participant does not already have orders to purchase a significant portion of the block.
Questions and Answers
The following are specific questions respecting the procedures for the execution of certain designated trades by a Participant and Market Regulation Policy’s response to each question:
1. What steps must a Participant take to facilitate an “off-marketplace” take-on trade in a listed security in furtherance of a “distribution” to clients?
Before a Participant agrees to the “take-on” trade, the Participant must apply to Market Regulation Policy in writing at UMIRRequests@iiroc.ca for an exemption under UMIR 6.4(2)(b).2 In the normal course, Market Regulation Policy will provide an exemption to allow the principal “take-on” leg of the “distribution” to be executed “off-marketplace” if:
- the size of the “take-on” trade is such that the trade could not be completed on a marketplace without being disruptive of the market;
- the price of the “take-on” trade varies from the intended price of the “distribution” (or the highest price in a range of possible distribution prices if the price of the distribution has not been finally determined) by an amount that is not more than the usual agency commission that would be charged by that Participant to that client for an order of the same size;3
- the Participant intends to “distribute” the block of shares to its clients and does not already hold client orders for a significant proportion of the block;
- the Participant agrees to execute the unwinding trade at the distribution price on a marketplace subject to all requirements , including the Order Protection Rule (OPR) under Part 6 of the Trading Rules; and
- to the extent that the distribution price is more than the greater of 5% or 10 trading increments lower than the prevailing market price at the time the distribution trades are to be executed, the Participant agrees to seek prior approval from Surveillance when moving the market in accordance with the requirements set out in UMIR 2.1 before executing the designated trade.
To assist Participants when requesting an exemption, we have provided further details on what should be included in the exemption application in Template 1 in Appendix A of Notice 22-0186 – Obtaining a Trading Exemption or Rule Interpretation.
Any exemption under UMIR 6.4(2)(b) granted by Market Regulation Policy applies only to the transaction described in the exemption application. The Participant must continue to comply with all other applicable requirements under UMIR, Investment Dealer and Partially Consolidated (IDPC) Rules, and securities legislation.
2. Does the take-on trade need to be a certain size in order to qualify for an off-marketplace exemption?
While Market Regulation Policy does not require a minimum volume or value for a transaction to qualify for an “off-marketplace” exemption under UMIR 6.4(2)(b), the Participant would need to demonstrate that the take-on trade is of a significant size such that the trade could not be completed on a marketplace without being disruptive of the market.
3. Are there any other circumstances under which Market Regulation Policy would not provide an “off-marketplace” exemption to facilitate a “distribution” of a block of securities?
Yes. Market Regulation Policy generally will not grant an “off-marketplace” exemption if, at the time of the proposed take-on trade, the Participant already holds client order(s) to buy a significant proportion4 of the block. In these circumstances, Market Regulation Policy believes that it is more appropriate for the transaction to be completed “on-marketplace” with the Participant acting as agent for both seller and purchaser(s).
However, it is acceptable for a Participant to have received “indications of interest” from clients to participate in the distribution.
4. How is a Participant expected to execute the “unwinding” trade?
After the negotiation of the take-on trade, the Participant would market the “distribution” of the block to its clients. The unwinding trade may be executed concurrent with or following the completion of the take-on trade. Unless Market Regulation Policy otherwise agrees, Market Regulation Policy expects the unwinding trade to be executed on a marketplace later that trading day. The unwinding trade should be recorded on a marketplace in a single principal-client trade for the entire block of stock at the distribution price. Depending on the market price at the time when the Participant seeks to print the unwinding trade at the distribution price on a marketplace, Participants may need to contact Surveillance5 at the New SRO for prior approval when moving the market price to the price at which the unwinding trade will occur, pursuant to subsections (3) and (4) of UMIR 2.1 Specific Unacceptable Activities.
After the unwinding trade has been printed on a marketplace, the Participant may allocate the securities to clients by means of journal entry for the balance of that trading day.6
5. What order markers should be used when executing the unwinding trade on a marketplace?
Participants should use the multiple client order marker on the buy side and the principal order marker on the sell side when executing the unwinding trade on a marketplace.
Other requirements under UMIR 6.2 also continue to apply. For example, if the Participant is aware of participation from insiders and/or significant shareholders at the time of executing the unwinding trade, then the Participant would also include the IA and/or SS marker(s) when printing the cross on a marketplace. The Participant would also need to file a report using the Regulatory Marker Correction System (RMCS7 ) to remove the IA and/or SS marker for any part of the buy volume that was not allocated to insider(s) and/or significant shareholder(s).
6. Should the Participant use the “bypass order” marker when executing the unwinding trade on a marketplace?
The execution of the unwinding trade is subject to OPR. Using the “bypass order” marker would limit interference from better-priced orders not included in the disclosed volume on the marketplace on which the unwinding trade is to be executed.
As the “bypass order” marker only limits interference on the marketplace to which an order is sent, the Participant may still have displacement obligations if there are better-priced orders displayed on other marketplaces that are protected marketplaces8 (see Question #7 below).
7. When displacing better-priced orders on other protected marketplaces, is a Participant required to use the “bypass order” marker?
No, but Market Regulation Policy recommends the use of the “bypass order” marker on orders sent to displace better-priced orders on other protected marketplaces to avoid interference from undisclosed liquidity. For example, if a Participant sends an order to a protected marketplace to trade with the disclosed volume on that marketplace and does not use the “bypass order” marker, the Participant takes on the risk that the order will interact with undisclosed volume, including hidden orders and the undisclosed portion of iceberg orders and Special Terms Orders. To the extent that not all of the better-priced orders included in the “disclosed volume” of protected marketplaces are filled, the Participant continues to have a displacement obligation.
For greater certainty, notwithstanding that a Participant enters an order on a particular protected marketplace that is of a sufficient volume and at a price that will fill the disclosed volume, to the extent that the Participant did not use the “bypass order” marker and encounters interference from undisclosed better-priced orders on other protected marketplaces, the Participant may not have met its obligations under OPR.
8. Can a Participant allocate shares to clients at a price that is different from the price of the unwinding trade on the marketplace?
No, the Participant would need to allocate shares to clients by journal entry at the same price as the execution price of the unwinding trade on the marketplace.
9. What is a Participant expected to do if not all of the unwinding trade is allocated to clients by the end of the trading day?
If a Participant has not allocated all the securities that were subject of the unwinding trade to clients by the end of the trading day, we expect that the Participant will take the unallocated securities into its inventory account and submit a report using RMCS to set out, among other things, the number of securities marked as a trade to multiple clients which have been taken into inventory.9
To the extent that a Participant has taken unallocated securities into inventory, any future sales of the securities must be completed “on-marketplace” as a principal trade that is subject to all of the provisions of UMIR, as well as applicable requirements from the Investment Dealer and Partially Consolidated (IDPC) Rules and securities laws.
10. If the Participant prints the “unwinding trade” on a marketplace later in the trading day, would the Participant be given additional time to allocate shares to clients?
Depending on the timing of the neogtiation of the take-on trade, a Participant may be seeking an off-marketplace exemption later in the trading day and printing the “unwinding trade” on a marketplace closer to the end of the trading day. In these cases, the Participant may include a request to extend the allocation period in their exemption application and Market Regulation Policy may extend the time period for the allocation of shares by journal entry until market opening on the following trading day.
11. Is a Participant required to submit a report to the Market Regulation Policy once the distribution has been completed?
Yes. After the “unwinding” trade has been fully allocated to clients or taken into inventory by the Participant, the Participant must submit a written confirmation to Market Regulation Policy at UMIRRequests@iiroc.ca setting out:
- the number of client accounts that received an allocation in the distribution;
- the largest percentage allocation to a single account; and
- the number of client accounts that were solicited to purchase securities covered by the unwinding trade.
12. Can Participants seek an exemption in advance, even if they do not have all of the information set out above?
Yes. If a Participant is concerned that there may not be another opportunity to seek an exemption at a later date or time, the Participant may apply for an exemption with respect to a potential take-on trade transaction at an earlier stage (for example, up to a certain volume of shares in a listed security, or provide a price range within which the transaction may be completed), even if the details of the transaction have not been finalized.
However, as Market Regulation Policy is not in a position to provide blanket exemptions and to faciliate an efficient exemption process, the Participant should strive to provide as much of the information requested in Template 1 in Appendix A of Notice 22-0186 as possible in its exemption application.
Where Market Regulation Policy grants an exemption in advance, the Participant must agree to:
- provide final details once they become available, such as final take-on price and distribution price; size of take-on trade, etc.
- comply with the timelines set out in this Notice, including:
- at the time of taking-on the block of shares off-marketplace, the Participant should have less than 25% of committed buy orders
- allocation to clients via journal entry must occur on the same trading day as the execution of the unwinding trade on a marketplace. However, if the unwinding trade was executed close to 5 pm (ET), Participants may allocate until market opening on the following trading day.
If it is later determined that the Participant no longer requires an exemption, the Participant should notify Market Regulation Policy at UMIRRequests@iiroc.ca.
13. Can an exemption still be considered if the transaction fails to meet all of the criteria of a take-on transaction?
Where a transaction does not satisfy the criteria of a take-on trade transaction contemplated in this Notice, Market Regulation Policy may consider an exemption application for other specific transactions pursuant to UMIR 11.1(1) provided the Participant demonstrates in writing that the transaction:
- would not be contrary to the provisions of any applicable securities legislation;
- would not be prejudicial to the public interest or to the maintenance of a fair and orderly market; and
- is warranted after due consideration of the circumstances of the particular person or transaction.
- 1Prior to their repeal, the wide distribution rules of the TSX required that a transaction meet several additional conditions, including:
• timely public announcement of the wide distribution;
• a minimum transaction value of at least $25,000,000;
• distribution to 25 or more clients, with no one client’s allocation being more than 50% of the total allocation; and
• completion of the wide distribution by the end of the fourth trading session following the announcement of the wide distribution.
- 2For a general description of the procedures to be followed and the information to be provided in order to obtain an exemption pursuant to UMIR 6.4(2)(b), see Notice 22-0186 – Obtaining a Trading Exemption or Rule Interpretation (December 1, 2022).
- 3In essence, this condition ensures that the request for an exemption to execute the trade on a marketplace is not an attempt to avoid the application of Rule 7.5 of UMIR dealing with recorded prices.
- 4The determination of what constitutes a “significant proportion” is a fact-specific analysis that takes into account various factors, including, but not limited to, the liquidity profile of the security and recent trading patterns in the security. While Market Regulation Policy retains sole discretion in determining what constitutes a “significant proportion” for the purposes of Rule 6.4(2)(b), Market Regulation Policy will generally consider client orders that account for more than 25% of the volume of the distribution to be a “significant proportion”.
- 5Contact information for Surveillance at New SRO: Surveillance Contacts.
- 6For this purpose, Market Regulation Policy considers the end of the “trading day” to be the close of trading on the last of the marketplaces on which the security trades and which provides pre-trade transparency. In the context of designated trade distributions to clients, Market Regulation Policy will also take into account the liquidity and volatility profile of the particular security when determining whether the “take-on” price satisfies this requirement.
- 7See Notice 21-0122 – Guidance Note – Marker Corrections and the Use of the Regulatory Marker Correction System (July 12, 2021) for guidance on the procedures for reporting order marker corrections.
- 8Both the New SRO and the CSA publishes a list of protected and unprotected marketplaces for the purposes of the order protection rule (see CSA Notice of Approval – Amendments to National Instrument 23-101 Trading Rules and Companion Policy 23-101CP to National Instrument 23-101 Trading Rules published on April 7, 2016). As of 2021, the New SRO (then the Investment Industry Regulatory Organization of Canada) and the CSA will only publish a new notice if there are changes to the list of of protected and/or unprotected marketplaces (see Notice 21-0038 – List of Protected and Unprotected Marketplaces (February 25, 2021).
- 9See Notice 21-0122 – Guidance Note – Marker Corrections and the Use of the Regulatory Marker Correction System (July 12, 2021) for guidance on the procedures for reporting order marker corrections. Permitting the unwinding trade to be marked “principal-client” combined with the submission of a Regulatory Marker Correction Form via a secure web-based system to the extent that the unwinding trade has not been fully allocated to clients, prevents information leakage on how much of the block of securities was taken into inventory by the Participant.