Proposed rule amendments — Fully paid securities lending and financing arrangements 

1. Background

Fully paid securities lending2 refers to the Dealer Member (Dealer) practice of borrowing client’s fully paid or excess margin securities.

This practice is not new in Canada and forms part of securities lending in general. Over the years, Dealers, especially those who custody client securities (either directly or on behalf of introducing brokers and portfolio managers), have been offering fully paid lending programs (FPL program) to their clients. Under these programs, the Dealer borrows client securities as a principal and in turn uses such securities to meet their in-house demand or lends them out to third parties. To secure the loan, the Dealer provides collateral to the client either directly or via a collateral agent.

Fully paid lending offers tangible benefits of unlocking assets for which there is market demand while generating additional income for the lending clients and their Dealers. At the same time, fully paid lending doesn’t come without risks, and it is therefore important that a client fully understand these risks before consenting to the dealer using their securities within their operations or lending them to others.3

IDPC Rule 4600 historically4 regulated traditional securities lending, which is mainly geared towards institutional lending, as well as the more isolated retail lending situations.5 In 2019, in view of the characteristics and risks of the FPL programs and their mass retail client target, CIRO (IIROC at that time) set out a more rigorous framework of conditions and restrictions for fully paid lending programs (FPL T&Cs). This was done in consultation with the Canadian Securities Administrators (CSA), the Canadian Investor Protection Fund (CIPF) and outside legal counsel. Pursuant to this framework, approved Dealer FPL programs were subjected to:

• a modified client protection regime which necessitated exemptions from IDPC Rule clause 4603(3)(ii) and the capital requirements in the Notes and Instructions to Schedule 1 of Form 1, and
• several terms and conditions that were designed to:
  • give more control and information to clients related to the risks of fully paid lending,
  • increase the likelihood of the client’s recourse to collateral in the event of a Dealer insolvency, and
  • limit fully paid securities lending to liquid securities with reduced volatility.

This framework was outlined in GN-4600-22-001, Guidance on Fully-Paid Securities Lending Programs (FPL Guidance).6  In this guidance, CIRO committed to gather information on the operation and evolution of the approved FPL programs for the purposes of developing rules tailored around such programs. The objective was to codify measures that have proven effective, preserve investor protection and remove the need for Board exemptions.

The Proposed Amendments around fully paid lending which we are publishing for comment in this bulletin seek to achieve such objective. They are the result of our review of the existing framework and consultations with our advisory committees and individual Dealers who currently operate or seek to operate these programs.

In addition, during the review we identified a few areas in the IDPC Rules and Form 1 that needed revisions for further clarity and consistency. Although these areas of the rules are not specific to fully paid lending, they deal with the related area of Dealer financing arrangements. For this reason, we recommend revisions as part of the same rule proposal.

1.1 Current Dealer fully paid lending activity

At present there are eight Dealers approved to offer FPL programs. More Dealers have expressed interest in these programs.

As of June 2023, the overall number of clients enrolled in approved FPL programs amounted to 165,000 clients. The majority of these clients are retail clients7 . As of June 2023, the dollar amount of fully paid securities on loan under the FPL programs was around half a billion CAD. These programs generated total revenue of around 18.8 million CAD in the 12-months preceding June 2023 which was shared between Dealers and clients. Borrowed securities are generally being used to lend to the street, or cover Dealer internal demand, for short selling, collateral requirements, or settlement purposes.

Dealers expect their FPL programs to continue to grow as clients become more familiar with these programs. They also provided feedback with regards to the need for flexibility in a few areas, such as borrowing from institutional clients, the securities eligible for lending and collateral type.

2. Proposed Amendments

The Proposed Amendments can be categorised into:

• amendments specific to retail fully paid lending,
• amendments with impact on financing arrangements, and
• amendments of consequential nature.

Below we discuss such amendments and their impact. The text of the Proposed Amendments to the IDPC Rules and Form 1 is set out in Appendix A and Appendix B; a blackline of the amendments is set out in Appendix C and Appendix D.

2.1 Proposed Amendments on fully paid lending

We are proposing to:

• Introduce a new Part B.2. in Rule 4600 entitled Borrowing retail client fully paid and excess margin securities, and
• make corresponding amendments to the Notes and Instructions of impacted Statements and Schedules in Form 1.

These amendments largely codify into our rules those FPL T&Cs that we deem efficient and preserve investor protections. In doing so, we keep the same policy approach with regards to fully paid lending in most areas with a few exceptions. We discuss these exceptions together with the codified requirements in the following sections.

2.1.1 The overall scope of new proposed Part B.2. of Rule 4600

The proposed Part B.2. of Rule 4600 sets out specific requirements for Dealers when borrowing fully paid or excess margin securities from retail clients. In a departure from the current FPL T&Cs, the requirements set out in Part B.2 of Rule 4600:

• are mandatory where the borrowing activity involves retail clients, and
• would only apply to borrowing activity involving institutional clients where the client opts to be treated as a retail client for lending purposes.8

Dealer FPL activity versus Dealer FPL programs

The requirements of part B.2. of Rule 4600 are intended to apply to all Dealer fully paid lending arrangements with the retail client regardless of whether this is done via a Dealer structured program (e.g., FPL program) or not. The proposed approach adds clarity, ensures a consistent customer protection regime across the retail client base, and mitigates regulatory arbitrage from arbitrary interpretations of what constitutes a program.

Retail FPL versus Institutional FPL 

The FPL T&Cs although tailored around FPL programs, which tend to attract retail clients, do not distinguish between institutional and retail clients. Instead, the Proposed Amendments seek to differentiate between the two client categories, in line with the existing client differentiation approach of Rule 4600. Following internal and industry consultations, we agree that more flexibility is warranted with regards to the institutional client in consideration of traditional lending market practices and the level of institutional client sophistication and risk mitigation tools at their disposal.

As such, Part B.2. in essence brings into the rules the more onerous FPL T&Cs and their client protection regime with applicability on the retail client fully paid lending. Institutional client lending on the other hand would continue to be subject to the traditional lending requirements of Rule 4600, unless the institutional client opts to be treated as a retail client. In other words, when lending fully paid or excess margin securities, the institutional client has the flexibility of structuring their loan arrangement pursuant to the more generic requirements of Rule 4600 on financing arrangements or subject the arrangement to the more onerous requirements of the proposed Part B.2. of Rule 4600.

2.1.2 Proposed section 4621 Consent and Suitability 

This section specifies the requirements that a Dealer can only borrow client securities upon the client’s prior consent and the determination, where applicable, that the fully paid lending services are suitable for the client.9  These requirements are aligned with our overall requirements around client consent10  and suitability determination,11  as well as the FPL T&Cs and we do not anticipate any net new impact as a result of their implementation.

2.1.3 Proposed section 4622 Securities Loan Agreement

This section specifies the requirement for a written securities loan agreement between the borrowing Dealer, lending client and any third party to the loan arrangement (e.g., introducing broker, portfolio manager, collateral agent) and prescribes the minimum mandatory provisions in that agreement.12  These requirements are aligned with current rule requirements, FPL T&Cs13  and market practices, which is why we do not anticipate any net new impact as a result.

2.1.4 Proposed section 4623 Disclosures

This section sets out the specific requirements that the borrowing Dealer provide the client with adequate disclosures regarding the loan arrangement, including its structure, benefits, risks and the Investor Protection Fund (IPF) coverage limitations, and obtain client’s acknowledgment to have understood such disclosures. These requirements are aligned with our more generic requirements around client disclosures, as well as the FPL T&Cs,14 and we do not anticipate any net new impact as a result of their implementation.

2.1.5 Proposed section 4624 Collateral

This section sets out the requirement that the borrowing Dealer must provide, and maintain for the duration of the loan, adequate collateral to fully secure the loan. In addition, the section prescribes the minimum criteria for the collateral to be deemed adequate, such as the collateral must be:

• cash, or when so permitted by CIRO, debt securities with a margin rate of 5% or less,
• at a minimum 102% of the market value of the borrowed securities for the cash collateral, and 105% for the securities collateral,
• held in a form acceptable to CIRO, such as the forms prescribed in the proposed subsection 4624(5).

The collateral requirements proposed here differ from the current requirements of Rule 4600, and specifically section 4607, due to the changes introduced by the FPL T&Cs for fully paid lending collateral arrangements.15 The proposed section 4624 largely codifies the collateral FPL T&Cs, in that collateral is restricted to cash unless CIRO permits the use of securities as collateral, and collateral is held in acceptable forms.

In a departure from the collateral value requirements of Rule 4600 and collateral FPL T&C, we are standardizing the collateralization rate to 102% for cash collateral and 105% for securities collateral. This is intended to eliminate the confusion and practical inconsistencies flagged by consulted Dealers with the current FPL T&Cs approach. The current FPL T&Cs require the Dealer to pass to the client any overcollateralization received from the street borrower, which may result in inconsistent collateralization between one loan and/or client to another. The proposed collateralization rates are consistent with industry lending practices. We expect that the consistency introduced with this provision will have a positive impact on Dealers.

2.1.6 Proposed section 4625 Asset reuse prohibition

This section specifies restrictions on the reuse of the securities loaned as well as the assets that are provided as collateral. The scope of this section is to mitigate risks that result from asset reuse, which can span from Dealer default risk to more systemic contagion risks.

This requirement is aligned with the FPL T&Cs16 and we do not anticipate any net new impact as a result.

2.1.7 Proposed section 4626 Recordkeeping

This section sets out the requirement that retail fully paid lending transactions are recorded in the securities trading account of the lending retail client, and such records must clearly distinguish the loaned securities and collateral provided.

Currently IDPC Rule clause 4603(3)(ii) requires that the client’s financing accounts are kept separate from the client securities trading account. In comparison, the FPL framework17 requires Dealers to record the client fully paid lending transactions (retail and institutional) into the client’s securities trading accounts and apply for Board exemption from clause 4603(3)(ii).18

The proposed section 4626 codifies the recordkeeping approach of the FPL T&Cs with regards to retail fully paid lending.19 In comparison, in line with client differentiation approach of the Proposed Amendments and Rule 4600, institutional fully paid lending will be governed by the existing recordkeeping requirement of IDPC Rule clause 4603(3)(ii) which applies to traditional lending.

This rule change adds clarity with regards to recordkeeping requirements and eliminates the present need for a Board exemption from clause 4603(3)(ii). As a result, we anticipate the impact to be that of reduced burden for the affected stakeholders.

2.1.8 Proposed section 4627 Client communications

This section specifies the requirements that communications to the lending clients around the loan arrangement adequately disclose the securities on loan, the collateral provided, the revenue earned, and commissions or fees paid directly or indirectly by the client. These requirements are aligned with our overall requirements around client communications and the FPL T&CS,20 and we do not anticipate any net new impact as a result of their implementation.

2.1.9 Proposed section 4628 Securities eligible for borrowing

The existing IDPC Rules do not restrict the fully paid securities that a Dealer can borrow from their clients. In comparison the FPL T&Cs restrict the securities that the Dealer can borrow to equity securities that are listed on an exchange and held by clients in non-registered accounts.21 Additional restrictive criteria seek to ensure that the borrowed Canadian listed equity securities meet certain low volatility thresholds.22

Under section 4628 we propose a more flexible approach given that market conditions may necessitate us to restrict or expand such criteria in an efficient manner. We codify in subsection 4628(1) the condition that Dealers can only borrow securities held by clients in their non-registered accounts. Pursuant to the proposed subsection 4628(2), CIRO will have the authority to prescribe from time-to-time restrictions on the securities that a Dealer can borrow from the client when it deems to be in the interest of the clients and the public. The restriction criteria will be published on CIRO’s website.

For the time being we intend to bring forward the existing FPL T&Cs restrictions as CIRO prescribed restrictions subject to the following:

• as part of this publication, we ask the question whether the existing restriction that only equity securities that are listed on the exchange can be borrowed by the Dealer should be expanded to include other securities; and
• regarding the existing Canadian listed equity securities, we plan to make a calculation modification. Once the Proposed Amendments become effective, Dealers must use the ‘6-month average volume weighted average closing price ≥ $2.00’ instead of the ‘6-month average volume weighted average price ≥ $2.00’ as one of the securities eligibility criteria for their FPL activity. We believe that the policy scope of this restriction, i.e., preservation of market integrity, will still be met with this simpler and less burdensome calculation methodology.

The securities eligibility criteria, to be published by CIRO once the Proposed Amendments enter in effect, is attached as Appendix F.

2.1.10 Proposed section 4629 Special audit report 

Under this section we propose to codify the condition in the FPL T&Cs that the borrowing Dealer produce a special purpose independent audit report regarding the Dealer’s fully paid lending activity.23 The intent of this requirement is to ensure that adequate check and balances are in place at the borrowing Dealer.

In a departure from the FPL T&Cs, which stipulate that the borrowing Dealer must produce the special audit report on an annual basis, we are proposing that such report be produced upon CIRO’s request. This is in alignment with our conduct and prudential risk-based approach now that Dealers have been running well-established FPL programs for several years.

We anticipate the impact of this provision to be between neutral to reduced burden for Dealers.

2.1.11 Proposed section 4630 Additional requirements and restrictions

This section sets out CIRO’s authority to prescribe additional requirements or restrictions when deemed in the clients’ and public interest. It further prescribes the contours of how CIRO can exercise such authority, such as when it seeks to further:

• increase the transparency of the fully paid lending activity,
• increase the likelihood of the lending client’s recourse to collateral in the event of a Dealer insolvency, and
• preserve market integrity.

Certain Dealer programs may have unique features that require CIRO staff to impose additional requirements with the client interest in mind, such as with regards to collateral holding model under the program or the information that must be disclosed to the client.

Having such authority enables CIRO to respond efficiently and swiftly to the needs of the investors and industry while taking into consideration different Dealer business models, market conditions and risks as well as the evolution of jurisprudence (e.g. on the matter of Dealer bankruptcy and the client’s recourse rights). CIRO will continue to exercise such authority in a transparent manner, and we expect the impact to be positive.

2.1.12 Proposed amendments to Form 1

In parallel to the above rule proposal (new Part B.2 of Rule 4600), we are proposing necessary corresponding amendments to Form 1 specific for fully paid lending transactions. The current Form 1 requires margin of either loan value deficiency or market value deficiency for financing transactions with ‘other counterparties’ depending on whether the Dealer has segregated the collateral or not. The Proposed Amendments exclude fully paid lending transactions from these margin requirements but introduce a new margin requirement that applies if the Dealer does not put aside adequate collateral for the fully paid lending client. The Proposed Amendments related to Form 1 specific to fully paid lending transactions include:

• introducing a margin requirement that applies if the Dealer does not put aside adequate collateral in compliance with the provisions of the proposed Part B.2. of Rule 4600 [Schedule 1, Notes and Instructions (7)(iv)(c)],
• allowing a one-day grace period for the Dealer to top-up collateral before a capital charge is triggered, which is consistent with operational practices and other financing arrangements​ [Schedule 1, Notes and Instructions (14)],
• ​adding requirements around collateral reporting and restrictions, such as to exclude collateral when determining free credits, client margin, and net equity [Statement D Notes and Instructions (2), Schedule 4 Notes and Instructions (2), (5)(v), (8)(1)(d), and Schedule 10 Notes and Instructions (4)].​

These amendments add clarity and certainty with regards to the applicable margin and collateral reporting requirements in Form 1. Also, they eliminate the need for Dealers to request Board exemptions from the current margin requirements when carrying fully paid lending.24

2.2 Proposed amendments on financing arrangements

The amendments proposed under this section seek to address existing overlaps and inconsistencies in the rule provisions that deal with financing arrangements. We intend the impact of these amendments to be that of enhanced rule clarity and consistency without any added burden on stakeholders.

2.2.1 Amendments to definitions in sections 1201 and 4602

We propose to amend section 1201, by replacing the current term written cash and securities loan agreement with the terms cash loan and securities loan. We do not think it necessary to define what a written agreement is as the rules already set out the provisions to be included in a written agreement. In comparison, the new terms align with the terminology used in IDPC Form 1 which puts the emphasis on the transaction and the differences between a cash loan and securities loan.

We propose to introduce in section 4602 the term financing arrangements, which captures a cash loan, a securities loan, a repurchase agreement, or a reverse repurchase agreement. The intention is to make the rules that reference these transactions, indiscriminately, easier to read. We also propose a minor amendment to the current term overnight cash loan agreement for added clarity.

2.2.2 Amendments to sections dealing with financing arrangement25 agreements

We propose to bring into section 4604 the agreement requirements for financing arrangements currently spread out between Rule 4600, and Rule 5800. In doing so we add clarity and consistency to our requirements and address any unnecessary overlaps or duplications which exist between these provisions at present. More specifically:

• we combine the requirements of section 4604, 5810, 5840 and 5850 into section 4604 while removing inconsistencies and adding clarity, such as:
  • replace ‘securities’ with ‘asset’, to capture the application of the requirements for securities as well as cash;26
  • remove entirely subsection 5840(1), because it implies that the requirements of section 5840 (to be brought into section 4604) are limited only to loan transactions involving cash;
  • the requirements in section 5840 (as proposed to be merged into section 4604) are intended to also apply to securities loan transactions that do not involve cash;
  • polish the drafting in the rest of the subsections;
• add in section 4604 (under clause (2)(iv)) the requirement that the written agreement set out the parties' rights to call on demand any collateral deficiency. Currently this requirement is limited to borrow/lend agreements with registered entities and repo/reverse repo agreements.27 We believe this is true for all financing arrangements in general and regardless of the counterparty.

2.2.3 Amendments to sections 4605 and 4606​

We propose to combine section 4605 and clause 4606(1)(ii) into the renumbered section 4610 under the new title Collateral other than cash and securities. This change adds clarity to the scope of these provisions and addresses any unnecessary repetitions.

2.2.4 Amendments to Form 1 regarding financing arrangement agreements

In parallel to the proposed IDPC Rules amendments regarding financing arrangement agreements, discussed under this section 2.2, we are proposing corresponding amendments to Form 1 which are necessary to ensure alignment between these two instruments with regards to these agreements, such as:

• Amendments to Schedule 1, Notes and Instructions (8)(i)
• Amendments to Schedule 1, Notes and Instructions (11)
• Amendments to Schedule 7, Notes and Instructions (7)(v)(iii), (8)(i)
• Amendments to Schedule 1 and 7, Notes and Instructions (13)

2.3 Proposed consequential amendments

These are amendments to other provisions in the IDPC Rules and Form 1 that are indirectly impacted by the Proposed Amendments discussed above and are necessary to ensure alignment with such amendments. These consequential amendments consist of:

• amending section 4318 to clarify that Dealers maintain the fully paid and excess margin securities in segregation until the date the securities are borrowed or loaned; ​
• amending section 4429 to clarify that only fully paid securities, with the exception of new issues and securities borrowed by the Dealer under Part B.2. of Rule 4600, may be transferred into a name other than the Dealer's name;
• deleting from Rule 4600 section 4607, which relates to current financing activity with “other counterparties”, to prevent confusion and overlap with the newly introduced Part B.2. of Rule 4600. The margin implications from credit risk exposure when dealing with ‘other counterparty’ are already addressed in ​​Schedule 1 and 7 of Form 1. The relevant portions of the existing 4607 provision are included in Schedule 1 and 7 to clarify the collateral requirements that allow the market value deficiency margin to be applied to other counterparties;
• making non-material amendments to a few provisions in the IDPC Rules and Form 1 to ensure structural consistency as well as alignment of language and cross-references, namely:
  • alignment language and cross-references in section 4312 and section 4424,
  • structural changes in section 4429,
  • structural changes in Rule 4600,
  • alignment of cross-references in section 5130,
  • structural changes or alignment of language in Rule 5800 and Rule 5900,
  • structural changes (e.g. sections numbering) in Form 1.

We anticipate the impact of these financing arrangement amendments to be that of rule alignment and to reflect current practices without any negative impact or added burden on stakeholders. 

3. Draft FPL Guidance

We are proposing revisions to the existing FPL Guidance, as a result of the Proposed Amendments. The revised guidance clarifies our expectations regarding Dealer compliance with our rules when offering fully paid lending to retail clients pursuant to the proposed Part B.2. of Rule 4600. We encourage stakeholders to read the Proposed Amendments on fully paid lending together with the revised guidance.

The Draft FPL Guidance is attached under Appendix E. The Draft FPL Guidance will enter into effect same time with the Proposed Amendments and replace current FPL Guidance.

4. Impact of the Proposed Amendments

4.1 Stakeholder impact

For the most part the Proposed Amendments:

• codify into our rules aspects of the current regulatory framework around fully paid lending that we deem efficient and preserve investor protection and market stability;
• add clarity and consistency to the existing rules around financing arrangements, without changing their substance.

Therefore, in these areas we anticipate that the impact of the Proposed Amendments will be that of added transparency and efficiency, without additional burden on affected stakeholders.

With regards to those areas where we have materially revisited our approach, we anticipate the impact to be positive and outweigh resulting costs, if any. More specifically:

• The proposed client differentiation approach adopts a stricter investor protection regime with regards to retail fully paid lending while enabling more flexibility with regards to institutional fully paid lending. We believe this approach strikes the right balance between investor protection and rulemaking proportionality and aligns with the overall client and business model differentiation approach of the IDPC Rules.
• The proposed standardization of the collateralization requirements [proposed subsection 4624(3)] will likely result in some Dealers with active FPL programs having to add additional collateral to meet this requirement. We believe such costs are outweighed by the benefits of the added investor protection and consistency across the industry that this new requirement brings.
• The proposed CIRO authority to impose additional requirements and restrictions on the Dealer fully paid lending activity (proposed section 4630), enables CIRO to respond efficiently and swiftly to the needs of each FPL program, within the prescribed contours of its authority.
• The elimination of the need for Board exemptions with regards to loan recordkeeping and margin requirements will result in burden reduction for affected Dealers and CIRO.

The Proposed Amendments do not impact Mutual Fund Dealers, because at present they are not permitted to engage in fully paid lending. We intend to assess the future applicability of the Proposed Amendments on these dealers later on as part of the Rule Consolidation Project.

An assessment of the impact of the Proposed Amendments is included as Appendix G.

4.2 Regional impact

No regional-specific effects as a result of the Proposed Amendments have been identified as they impact indiscriminately all industry stakeholders across Canada.

4.3 Impact of other policy projects

There are no substantive cross dependencies between the Proposed Amendments and the parallel Rule Consolidation Project at this stage, mainly due to the lack of comparable provisions in the Mutual Fund Dealer Rules. We expect the impact of having to reflect the Proposed Amendments, once approved, into the new consolidated rules to be minimal.

We do however anticipate an indirect impact as a result of the Proposed Derivatives Rule Modernization amendments,28 once they enter into effect. Under these amendments the definition of ‘institutional client’ has been expanded to include individuals who meet the definition’s thresholds and request to be treated as institutional investors. The new definition does not influence our determination to differentiate between the institutional and retail clients for the purposes of the Proposed Amendments. However, the affected stakeholders should give due consideration to this upcoming change.

5. Alternatives Considered

We have considered both alternatives of:

• keeping the current regulatory framework in place, which relies on Board exemptions, or
• publishing the Proposed Amendments under the umbrella of the Rule Consolidation Project.

These alternatives pose challenges in terms of substance and timelines. In comparison to the current framework, the Proposed Amendments enhance the efficiency and transparency of the regulatory framework around fully paid lending while reducing procedural burden for the stakeholders involved. At the same time, we decided to publish the Proposed Amendments now so that we can move forward with the consultation and implementation of these amendments independent of the complexities and probably longer timelines of the Rule Consolidation Project.

6. Questions

While comment is requested on all aspects of the Proposed Amendments, comment is also specifically requested on the following questions:

• Question 1: Do you have any concerns with the proposed client differentiation approach whereby the retail client fully paid lending is subject to the more rigorous requirements of Part B.2. of Rule 4600, as opposed to the institutional client who can lend securities under traditional lending?
• Question 2: Should we allow the Dealer to borrow securities from their retail client other than equity securities that are listed on the exchange? Why yes or why not? If yes, also indicate the type/quality of the securities that should be allowed and the underlying reason.

7. Policy Development Process

7.1 Regulatory Purpose

The Proposed Amendments seek to enhance the rule framework regarding retail fully paid lending and address overlaps and inconsistencies in the existing financing arrangements rules.

The Proposed Amendments have been determined to be in the public interest because they would:

• foster fair and efficient capital markets and promote market integrity,
• facilitate access to advice and products for investors of different demographics,
• promote the protection of investors,
• accommodate innovation and ensuring flexibility and responsiveness to the future needs of the evolving capital markets, without compromising investor protection.

7.2 Regulatory Process

The Board of Directors of CIRO (Board) has determined the Proposed Amendments to be in the public interest and on January 24, 2024, approved them for public comment.

We consulted with the following CIRO advisory committees on this matter:

• Financial and Operations Advisory Section - Operations and Capital Formula Sub-Committees
• Conduct, Compliance and Legal Advisory Section - Order Execution Only Sub-Committee

We also consulted with several individual Dealers who currently operate or seek to operate these programs.

After considering the comments on the Proposed Amendments received in response to this Request for Comments together with any comments of the CSA, CIRO staff may recommend revisions to the Proposed Amendments. If the revisions and comments received are not material in nature, the Board has authorized the President to approve the revisions on CIRO’s behalf and the revised Proposed Amendments will be subject to approval by the CSA. If the revisions or comments are material, CIRO staff will submit the Proposed Amendments, including any revisions, to the Board for approval for republication or implementation, as applicable.

8. Appendices

Appendix A - Proposed Amendments to IDPC Rules (clean)

Appendix B - Proposed Amendments to Form 1 (clean)

Appendix C - Proposed Amendments to IDPC Rules (blackline)

Appendix D - Proposed Amendments to Form 1 (blackline)

Appendix E - Revised draft Guidance on fully paid securities lending

Appendix F - Fully paid lending – Securities eligibility criteria

Appendix G - Impact Assessment

Appendix F – FPL Securities eligibility criteria

Fully paid securities lending (FPL) – Securities eligibility criteria

Effective [date], a Dealer Member (Dealer) can only borrow client fully paid and excess margin securities, pursuant to Part B.2. of IDPC Rule 4600, that meet the following eligibility criteria.

Rule prescribed criteria29

The borrowing Dealer must ensure that they only borrow client securities held by clients in their non-registered accounts.

Additional CIRO prescribed criteria30

The borrowing Dealer Member must only borrow client equity securities listed on an exchange. For Canadian listed equity securities, the Dealer must ensure that they meet at least one of the following criteria:

• 6-month average volume weighted average closing price ≥ $2.00, or
• 6-month average daily trading volume ≥ 100,000 shares, or
• 6-month average free float market capitalization ≥ $200 million.

The securities eligibility criteria prescribed by CIRO may change from time to time. 

To ensure compliance with the securities eligibility restrictions, Dealers are expected to maintain a list of securities eligible under the fully paid lending activity based on the above criteria. They are also expected to review their fully paid lending transactions against these criteria at least monthly and terminate loans that don’t meet the criteria as soon as possible.31

Appendix G – Impact Assessment

I. Impact Assessment Table

In the impact assessment table below, we list:

• the major policy elements of the Proposed Amendments,
• a description of the intended policy benefits of each element, and
• an assessment of its impact on clients, Dealer Members and CIRO itself.

We discuss the Proposed Amendments and their impact under the following categories:

• Proposed amendments on fully paid lending
• Proposed amendments on financing arrangements
• Proposed consequential amendments

References to the FPL T&Cs are references to the terms and conditions imposed on Dealer fully paid lending programs as outlined in GN-4600-22-001, Guidance on Fully-Paid Securities Lending Programs.

The Proposed Amendments do not have an impact on Mutual Fund Dealers, because at present they are not permitted to engage in fully paid lending.

II. Conclusions

We concluded that, if approved, the Proposed Amendments would result in:

• enhanced retail investor protection,
• enhanced procedural efficiency,
• needed flexibility with regards to different lending models and client type,
• added clarity and consistency.

While there could be some cost impacts on Dealers, we believe the benefits of the Proposed Amendments outweigh such costs.

III. Cost Estimate

We do not know the dollar magnitude of the collective impacts of the Proposed Amendments, and we cannot determine it without detailed stakeholder feedback as part of this public consultation.

IV. Questions

• 2We use ‘fully paid securities lending’ and ‘fully paid lending’ interchangeably throughout this Bulletin.
• 3Refer to section 1.4 of the revised draft fully paid lending guidance included within Appendix E for a discussion of the risks associated with securities lending.
• 4Before December 2021, securities lending was regulated under Dealer Member Rule 2200 Cash and Securities Loan Transactions, latter replaced with IDPC Rule 4600. 
• 5In particular, IDPC Rule section 4607 deals with collateral arrangements that are common in retail securities lending arrangements. This in combination with the more generic IDPC Rules and the Form 1 requirements applicable to the Dealer – retail clients relationship laid out the retail lending and customer protection regime.
• 6The guidance was initially issued on June 17, 2019, through the issuance of IIROC Rules Notice 19-0109 and subsequently replaced by GN-4600-22-001 with substantially the same guidance that was updated to reflect changes in rule numbering resulting from the implementation of IIROC’s plain language rules.
• 7A small percentage of institutional clients are enrolled in the programs run at two Dealers.
• 8 Proposed IDPC Rule, section 4620.
• 9There is no obligation to assess the suitability of a fully paid lending program service offered through an order execution only account (pursuant to IDPC Rule subsection 3404(1)). 
• 10IDPC Rule section 4312.
• 11IDPC Rule 3400.
• 12In the Draft FPL Guidance, we clarify that while there can be separate agreements when multiple parties are involved, for the purposes of our rules they will be deemed part of a master securities loan agreement.
• 13FPL T&C outlined in section 3.2.1 of the FPL Guidance.
• 14FPL T&C outlined in section 3.2.2 of the FPL Guidance.
• 15FPL T&Cs as outlined in section 3.1.4 of the FPL Guidance. While the guidance deals with the situations when cash is the only collateral type allowed under the FPL programs, CIRO has permitted the granting of securities as collateral in exceptional circumstances where the proposed collateral holding model (i.e., via a collateral agent for the client) increases the likelihood of the client’s recourse to collateral in the event of the borrowing Dealer insolvency.
• 16Outlined in sections 1.4 and 3.1.4 of the FPL Guidance.
• 17See FPL Guidance for an outline of such framework and the basis for it.
• 18Outlined in Section 3.1.1 and 3.2.4 of the FPL Guidance.
• 19In comparison, institutional fully paid lending will continue to be governed by IDPC Rule clause 4603(3)(ii).
• 20Outlined in Sections 3.2.3 to 3.2.5 of the FPL Guidance.
• 21FPL T&Cs outlined in Section 3.1.2 of the FPL Guidance.
• 22FPL T&Cs outlined in Section 3.1.2 of the FPL Guidance.
• 23FPL T&Cs outlined in section 3.3.3 of the FPL Guidance.
• 24Currently Dealers with FPL programs rely on Board exemptions from the margin requirements in the Notes and Instructions to Form 1, Part II, Schedule 1 (Lines 4, 8 and 12), given the lack of margin and collateral rules specific to these programs. Section 3 and 4 of FPL Guidance.
• 25As discussed above, this new term is intended to capture a cash loan, a securities loan, a repurchase agreement, or a reverse repurchase agreement.
• 26See proposed revisions in clause 4604(2)(i) and (iii), which correspond to current clauses 5840(3)(i) and (iii), and 5850(2)(i) and (iii).
• 27Current subsection 4604(2) and clause 4606(1)(i).
• 28For information on the status of this initiative, refer to the Proposed Derivatives Rule Modernization, Stage 1, publications on CIRO’s website.
• 29IDPC Rule subsection 4628(1).
• 30IDPC Rule subsection 4628(2).
• 31Guidance on fully paid securities lending GN-[SERIES]-2#-####.