July 4, 2013 (Toronto, Ontario) – The Investment Industry Regulatory Organization of Canada (IIROC) announced today it has adopted rule amendments, approved  by  the Canadian Securities Administrators (CSA), to manage the risks associated with electronic trading relationships between IIROC-regulated dealers and other parties.

The amendments create a uniform rule framework, applicable to all IIROC Dealer Members, that defines permissible electronic trading arrangements and prescribes appropriate supervisory and compliance procedures. Dealers will be required to manage the financial, regulatory and other risks that may arise when third parties electronically transmit orders directly to a marketplace.

“This new framework aligns Canada’s regulations with rapidly evolving trading technologies and practices. It ensures there are proper controls in place for all trading activity regardless of the source,” said Wendy Rudd, IIROC’s Senior Vice-President, Market Regulation and Policy.

The changes complement IIROC’s electronic trading rules that require appropriate controls for all trading activity, and the CSA’s amendments to National Instrument 23-103 Electronic Trading and Direct Electronic Access to Marketplaces.

The amendments are effective March 1, 2014 to ensure there is sufficient time for implementation by dealers and their clients. As well, IIROC dealers with existing access agreements have until September 1, 2014 to replace or amend them.

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Background

On June 28, 2012:

• The CSA announced the approval of National Instrument 23-103 Electronic Trading which became effective March 1, 2013.
• IIROC issued a package of proposed rule changes and guidance to align its Universal Market Integrity Rules (UMIR) with the electronic trading provisions of NI 23-103.
• These changes, which are now effective, ensure that market participants have automated pre-order-entry filters in place for all trading activity, regardless of source, to effectively manage the risks associated with electronic trading.
• The Notices related to these changes are:
  • Provisions Respecting Electronic Trading; and
  • Guidance Respecting Electronic Trading.
• All automated order systems (also known as algorithms) used by dealers or their clients must be regularly tested and monitored.
• On October 25, 2012:
  • The CSA issued a news release titled: Canadian Securities Regulators Seek Comment on Amendments Relating to Direct Electronic Access.
  • IIROC proposed Rule Amendments and Guidance Respecting Third-Party Electronic Access to Marketplaces.
• The final IIROC amendments announced today and related guidance confirm that third- party electronic access to a marketplace is a “closed system” under which a Participant may provide a third party with electronic access to a marketplace by:
  • “direct electronic access” or “DEA”,
  • a “routing arrangement”, or
  • an “order execution service”.
• The UMIR provisions regarding DEA complement the proposed amendments to NI 23-103. In addition, they establish clear requirements for IIROC Dealer Members regarding routing arrangements with other dealers.
• While the IIROC amendments introduce a new and more comprehensive framework for third-party electronic access to marketplaces, many of the requirements formalize or clarify existing requirements, guidance and industry practices.

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IIROC is the national self-regulatory organization which oversees all investment dealers and trading activity on debt and equity marketplaces in Canada. Created in 2008 through the consolidation of the Investment Dealers Association of Canada and Market Regulation Services Inc., IIROC sets high quality regulatory and investment industry standards, protects investors and strengthens market integrity while maintaining efficient and competitive capital markets. IIROC carries out its regulatory responsibilities through setting and enforcing rules regarding the proficiency, business and financial conduct of dealer firms and their registered employees and through setting and enforcing market integrity rules regarding trading activity on Canadian equity marketplaces.

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