Guidance on the Definition of ​“Foreign Organized Regulated Market”

1. Background

Rule 6.4 of UMIR 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 marketplace2. The rule sets out several exceptions, including one that permits trades to be executed on a FORM3. Under UMIR, a FORM is a market outside of Canada:

1. 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 (IOSCO);
2. 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
3. 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:
4. the trade is required to be reported and is reported to the market forthwith following execution;
5. at the time of the report, the trade is monitored for compliance with securities regulatory requirements; and
6. at the time of the report, timely information respecting the trade is provided to information vendors, information processors or persons providing similar functions respecting the dissemination of data to market participants for that market.

The FORM definition was introduced to ensure that trades executed by a Participant in a listed or quoted security outside of Canada occur on a market that offers regulatory oversight and public data comparable to a Canadian marketplace4. CIRO also noted that “simple trade reporting facilities” were not recognized by the Canadian Securities Administrators as marketplaces5. CIRO’s position has remained consistent, and the original policy objective continues to guide the interpretation of the FORM definition.

2. Discussion

2.1 Market Registration

The FORM definition requires, among other things, that any market outside of Canada be recognized or registered with a securities regulatory authority that is an ordinary member of IOSCO. This requirement shows the importance of cooperation and shared standards among IOSCO members. When a market is recognized or registered by an IOSCO member, that regulator can access market information and share it with other regulators for enforcement or other regulatory purposes.

Dealer registration is not equivalent to market registration. In the U.S. for example, broker-dealers that “internalize” orders by matching them with their own inventory do not meet section (a) of the FORM definition. These firms are not required to register as an alternative trading system (ATS) and for trade reporting purposes, internalized over-the-counter (OTC) trades are not reported as “ATS data” to the Financial Industry Regulatory Authority (FINRA).6 If a U.S. broker-dealer reports an internally matched trade to a trade reporting facility, that facility alone does not qualify as a recognized or registered market under section (a) of the FORM definition.

2.2 Regulatory Reporting and Data Dissemination

Sections (a), (b) and (c) of the FORM definition apply in conjunction with each other. This means that in addition to being recognized or registered as a market under section (a), for a market outside of Canada to qualify as a FORM, it must:

• pursuant to section (b), have order entry and trade execution monitored for compliance with regulatory requirements, either at the time of entry and execution or at the time of trade reporting. This monitoring can be done by a self-regulatory organization (SRO) recognized by the securities regulatory authority, or by the market that has been empowered by the securities regulatory authority; and
• pursuant to section (c), display and disseminate data immediately when a trade is executed or reported to ensure full 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.

3. Impact

Participants are reminded that all trades executed “off-marketplace” must comply with Rule 6.4 of UMIR. A Participant that routes orders for listed or quoted securities to a U.S. broker-dealer or another foreign dealer for execution “off-marketplace” should review its routing practices to ensure compliance with Rule 6.4. Where a Participant relies on the exemption under Rule 6.4(2)(d), those trades must be executed on a FORM7. These requirements also apply to listed securities, which include inter-listed securities, i.e., securities listed on both a foreign market and on an Exchange.

4. Applicable Rules

UMIR Rules this Guidance Note relates to:

• UMIR 1.1
• UMIR 6.4

5. Previous Guidance Note

This Guidance Note replaces Guidance Notice 14-0293 – Guidance on the Definition of “Foreign Organized Regulated Market” (December 15, 2014).

• 2“Marketplace” is defined in UMIR as having the same meaning as set out in section 1.1 of Corporation By-law No.1.
• 3See Rule 6.4(2)(d). Rule 6.4(3) qualifies that the exemption would not apply to an order of a Canadian account denominated in Canadian funds that:
  1. is part of an intentional cross;
  2. is part of a pre-arranged trade;
  3. is for more than 50 standard trading units; or
  4. 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 Part 6 of the Trading Rules. 
  In addition, certain provisions of the Investment Dealer and Partially Consolidated Rules continue to apply to a Participant entering the order, such as IDPC Rule 1402 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. The exemption for an off-marketplace trade involving a non-Canadian account provided in Rule 6.4(2)(e) would not apply when trading with or on behalf of a Canadian account.
• 4See Market Integrity Notice 2008-008 – Amendment Approval – Provisions Respecting “Off-Marketplace” Trades (May 16, 2008). At the time, the FORM definition excluded the bulletin board previously known as “Pink Sheets” and the OTC Bulletin Board outside of the historical NASD (now known as FINRA) operating hours and certain reporting facilities operated by Nasdaq and the NASD.
• 5See 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: OTC Transparency Data.
• 7Participants may refer to the SEC’s “ATS list” updated periodically at: Alternative Trading System (ATS) List.