Risk-Bid Tenders – Trading a Portfolio of Securities as Principal

1. Definition of a “Risk-Bid Tender”

A risk-bid tender occurs when a Participant, acting as principal, is asked by a client to provide a set price for the purchase or sale of a portfolio of securities. One or more Participants may be asked to bid as principal on the transaction. The securities which are included in the portfolio trade may be fully disclosed or the request may be for a bid without specific information on the individual securities. In some cases, the Participant will be asked to provide a price for each security in the portfolio. For the purposes of a risk-bid tender, a “portfolio trade” is a trade involving the simultaneous purchase and sale of at least 10 listed or quoted securities, provided that no single security comprises more than 20% of the total value of the transaction.

2. Restrictions on Recorded Prices

Rule 7.5(2) of UMIR provides that a Participant may not execute a principal trade on a marketplace if the recorded price is:

• in the case of a sale to a client, lower than the net cost to the client by more than the usual agency commission for a client order of that size, or
• in the case of a purchase from a client, higher than the net proceeds to the client by more than the usual agency commission for a client order of that size.

UMIR defines “net cost” to mean the total amount the client pays for a purchase based on the marketplace price plus any commissions, and minus any discounts, rebates, or other monetary benefits the client receives from the Participant or anyone else on that trade.

The term “net proceeds” is defined to mean the total amount the client receives from selling securities based on the marketplace sale price less any commissions, plus any discounts, rebates, or other monetary benefits they receive.

3. Usual Agency Commission in a Risk-Bid Tender

CIRO expects that the amount of the commission that would be charged by a Participant in a risk-bid tender will be greater than the usual agency commission for an order of the same size due to the additional risk assumed by the Participant in agreeing to act as principal in relation to the transaction (the “risk-bid premium”). If a risk-bid portfolio is presented to the Participant as an undisclosed portfolio, CIRO expects the applicable risk-bid premium to be greater than the risk-bid premium for a fully-disclosed portfolio.

In complying with Rule 7.5(2) of UMIR in the context of a portfolio trade in a risk-bid tender, the Participant cannot provide for a “negative commission”. A Participant who undertakes a “risk-bid” transaction must execute:

• the sales to the client at an aggregate net cost to the client which is not greater than the aggregate recorded prices of the portfolio by more than the aggregate usual agency commission for orders of the same size (including an appropriate risk-bid premium); or
• the purchases from the client for aggregate net proceeds to the client which are not less than the aggregate recorded prices of the portfolio by more than the aggregate usual agency commission for orders of the same size (including an appropriate risk-bid premium).

In the context of a risk-bid tender, if the parties agreed upon a single price for the portfolio the Participant must calculate the aggregate net cost or net proceeds for the entire portfolio. The Participant must then compare the aggregate net cost or net proceeds of the portfolio to the aggregate recorded price for the execution of the portfolio. The difference must not be greater than the aggregate usual agency commission for orders of the same size, with an allowance made for an appropriate risk-bid premium. If the bid is structured such that there is a price agreed upon for each security included in the portfolio, the Participant must calculate the net cost or net proceeds for each particular security included in the portfolio. The Participant must then compare the net cost or net proceeds of each security to the price for each security as recorded on the marketplace. The difference must not be greater than the usual agency commission that would be charged in relation to that individual security if that security was traded on its own outside of the portfolio (with an allowance made for an appropriate risk-bid premium).

4. “Moving the Market” to Execute a Risk-Bid Tender

If the agreed aggregate value of the portfolio differs from the aggregate value of the portfolio recorded on the marketplace by more than the aggregate amount of the usual agency commissions for orders of the same size (including the risk-bid premium), then the Participant, in the course of executing the trades on a marketplace, must move the market prices of one or more of the securities comprising the portfolio in an orderly manner. The Participant must move the market such that the difference between the agreed upon aggregate value of the portfolio and the aggregate value of the portfolio as recorded on the marketplace does not exceed the aggregate usual agency commission that would be charged on such trades (including the risk-bid premium).

A Participant is entitled to utilize its discretion in determining:

• the particular securities comprising the portfolio for which the market price will be moved; and
• the amount of price movement for any individual security comprising the portfolio.

All executions must be made at prices that comply with UMIR requirements. In moving the price of any security, the Participant must be aware of the provisions of UMIR 2.1(3) and (4). UMIR 2.1(3) prohibits any Participant or Access Person from entering an order on a marketplace that is intended to execute as a pre-arranged trade or an intentional cross without the prior approval of the Market Regulator, if the transaction would be undertaken at a price that will be:

• less than the lesser of 95% of the best bid price and the best bid price less 10 trading increments; or
• more than the greater of 105% of the best ask price and the best ask price plus 10 trading increments.

If the intention is to move the market more than the amount set out in UMIR 2.1(3), the Market Regulator may require the entry of a series of orders over a period of time pursuant to UMIR 2.1(4). This time period will generally not be less than:

• 5 minutes if the price variation from the best ask price or best bid price, as applicable, is more than 5% but less than 10%; and
• 10 minutes if the price variation is 10% or more.

5. Example

The following example is provided only for guidance on the interpretation of the application of the UMIR provisions to a risk-bid tender.

If a client asked a Participant to purchase the portfolio of securities outlined in the following table, the aggregate of the “printed” or recorded price cannot be more than $2,645 higher than the agreed price paid to the client. In this example, $2,645 is the sum of the aggregate usual commission that the Participant would charge for the individual trades (taking into consideration the risk-bid premium). If the prevailing markets were such that the portfolio could not be printed at an aggregate value at or between $835,000 (the aggregate agreed price) and $837,645 (the aggregate agreed price plus the aggregate usual agency commission including the risk-bid premium), the Participant would be obligated to move the market price for one or more of the securities such that the aggregate of the recorded prices for the portfolio would fall within the acceptable range.

6. Applicable Rules

UMIR Rules this Guidance Note relates to:

• UMIR 1.1
• UMIR 2.1
• UMIR 7.5

7. Previous Guidance Note(s)

This Guidance Note replaces:

• Market Integrity Notice 2005-034 – Risk-Bid Tenders – Trading a Portfolio of Securities as Principal (October 28, 2005).