Amendments Respecting Reasonable Expectations to Settle Short Sales

1. Comments received

We received twenty-two comment letters in response to CIRO Bulletin 25-0001. While only eight commenters provided comments in relation to the Amendments, we provide a summary of all public comments received and our responses in Appendix D.

2. Description of Non-Material Changes

As the rule changes relating to the close-out requirements previously proposed in CIRO Bulletin 25-0001 are not being implemented as part of these Amendments, we have removed certain references and provisions relating to the close-out requirements and renumbered certain provisions to maintain consistency in the sequencing of provisions.

The text of the Amendments is set out in Appendix A. A blackline of the changes compared to the current rules is set out in Appendix B. A blackline of the changes compared to the previous publication is set out in Appendix C.

3. The Amendments

The Amendments consist of the following:

• extending the requirement for a reasonable expectation to settle trades in listed securities on settlement date to investment dealers that are not Participants under UMIR
• creating an exception to the reasonable expectation to settle requirement for a person that sold short “deemed to own” securities.

3.1 Extending requirement for a reasonable expectation to settle to investment dealers that are not Participants

To address a regulatory gap, we are extending the requirement for a reasonable expectation to settle on settlement date to investment dealers that are not Participants under UMIR. This obligation previously applied only to Participants and Access Persons under UMIR, allowing trades to be executed by Participants for originating dealers that are not subject to the same standard. To ensure a level playing field, we are extending this requirement to investment dealers that are not UMIR Participants, given that the originating dealer would be the one that has the relationship with the underlying client and be in a better position to evaluate whether this requirement can be met. Applying the same requirement across all investment dealers ensures consistent pre-trade settlement expectations, even in cases where an executing Participant may be relying on an originating dealer that is not a Participant to have a reasonable expectation to settle on settlement date.

3.2 ‘Deemed to Own’ Exception

The Amendments introduce an exception to the requirement to have a reasonable expectation to settle on settlement date in cases where a seller has sold short a security that they are ‘deemed to own’. We created this exception to recognize that in certain cases, delays in delivering securities may be due to processing and operational issues that are outside of the seller’s control, such as the removal of legends for restricted securities.

Where the ‘deemed to own’ exception applies, the investment dealer would not be required to have a reasonable expectation to settle on settlement date, but rather the investment dealer must be reasonably informed that the seller would deliver the security:

• once all delivery restrictions have been lifted, and
• no later than thirty-five calendar days following the trade date (T+35).

A seller would be “deemed to own” a security if they have complied with one of the following conditions, either directly or through an agent or trustee:

1. purchased or entered into an unconditional contract to purchase the security, but has not yet received delivery of the security;
2. owns another security that is convertible or exchangeable into that security and has tendered such other security for conversion or exchange or has issued irrevocable instructions to convert or exchange such other security;
3. has an option to purchase the security and has exercised the option;
4. has a right or warrant to subscribe for the security and has exercised the right or warrant; or
5. has entered into a contract to purchase a security that trades on a when issued basis and such contract is binding on both parties and subject only to the condition of issuance or distribution of the security.

Investment dealers may rely on the ‘deemed to own’ exception where the above criteria are met as an exception to the CIRO requirement for a reasonable expectation to settle under UMIR 3.3 and IDPC Rule 4782. However, this exception would not prevent a trade counterparty from exercising their ability to initiate a buy-in pursuant to applicable processes and rules of CDS Clearing and Depository Services Inc., as these processes are outside of CIRO requirements.

3.2.1 ‘Deemed to Own’ Exception in relation to Warrant and Option Exercises

CIRO recognizes that the inclusion of warrants and options as part of equity units may be a common financing structure in Canada. Given that this is an important part of capital raising for early-stage issuers, which are an integral part of Canadian capital markets, it is important that we avoid unnecessary market disruptions as part of this process. The introduction of the ‘deemed to own’ exception provides an important distinction between temporary administrative delivery delays arising from legitimate exercises of warrants and options, and other types of settlement failures.

Following industry consultation, we have heard that a common strategy by investors is to short sell the underlying security and then use the proceeds to exercise the related warrant or option to cover the short sale. The ‘deemed to own’ exception would be available in this case as long as the investment dealer has received the seller’s instructions for the option or warrant exercise prior to, or on the same day as, the short sale and exercises sufficient options or warrants to cover the short sale. Maintaining appropriate records of client instructions including time of receipt would allow investment dealers to demonstrate compliance with the ‘deemed to own’ exception.

3.2.2 Must be marked as a ‘short sale’

Where a seller is relying on the ‘deemed to own’ exception, the trade would still need to be marked as a ‘short sale’ on the marketplace under UMIR 6.2(1)(b)(viii). Given that the seller would not expect to receive delivery of the shares until after settlement date, the trade would be considered a short sale pursuant to section 1.1 of UMIR.

4. Implementation

The Amendments will be effective on August 11, 2026, being 90 days from the publication of the Implementation Bulletin.

5. Appendices

Appendix A – Clean copy of the Amendments to the UMIR and IDPC Rules

Appendix B – Blackline comparison of the Amendments to the current Universal Market Integrity Rules

Appendix C – Blackline comparison of the Amendments to the Proposed Amendments published on January 9, 2025

Appendix D – Summary of public comments