Background

UMIR 6.4 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 includes a number of exceptions, including an exception for trades executed on a FORM3. UMIR defines FORM as 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;
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,
4. 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 implemented with the stated objective that trades conducted by a Participant in a listed or quoted security outside of Canada should be conducted on a market that has substantially the same regulatory monitoring and dissemination of data to the public as would be present if the trade had been conducted on a marketplace in Canada4. IIROC (then Regulation Services Inc.) also noted that “simple trade reporting facilities” were not recognized by the CSA as marketplaces5. IIROC’s views have not changed in this regard, and the originally stated objective continues to be the policy objective underlying the FORM definition.

Discussion

Market Registration

The FORM definition requires, among other things, that the market outside of Canada be recognized by or registered with a securities regulatory authority that is an ordinary member of the International Organization of Securities Commissions (“IOSCO”). This requirement is indicative of the reliance on comity of securities regulatory standards among IOSCO members. Market recognition or registration by an ordinary IOSCO member also provides the IOSCO member with regulatory market information that can be shared with other regulators for enforcement or other regulatory purposes.

Dealer registration is not equivalent to market registration. Broker-dealers in the U.S. that “internalize” orders by matching them with their own inventory do not meet section (a) of the FORM definition. A U.S. broker-dealer engaged in internalizing activity is not required to register as an alternative trading system (“ATS”) and internalized over-the-counter (“OTC”) trades are not recognized in the U.S. as being “within an ATS” for the purposes of reporting ATS volume and trade count information for equity securities.6 If a U.S. broker-dealer reports a trade that it has internally matched to a trade reporting facility such as the OTC Reporting Facility (“ORF”), the trade reporting facility alone does not meet the definition of FORM since it is not a recognized or registered market pursuant to section (a) of the FORM definition.

Regulatory Reporting and Data Dissemination

Sections (a), (b) and (c) of the FORM definition apply in conjunction with each other such that in addition to recognition or registration as a market as required under section (a), for a market outside of Canada to qualify as a FORM, it must:

• pursuant to section (b), monitor the entry of orders and the execution or reporting of trades for compliance with regulatory requirements at the time of entry and execution to enable the self-regulatory organization (“SRO”) or market to monitor trades in “real-time”; and
• pursuant to section (c), display and disseminate data regarding each trade at the time of execution or reporting of the trade on that market so as to provide trade information 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.

Impact

Participants are reminded that if they execute trades “off-marketplace” it must be in a manner that complies with UMIR 6.4. A Participant that routes orders of listed or quoted securities to a U.S. broker-dealer or other foreign dealer for execution “off-marketplace” should review its routing practices to ensure compliance with UMIR 6.4. A Participant that relies on the exemption under UMIR 6.4(2)(d) must execute the trades on a FORM7.  A listed security, to which these requirements apply, includes an “interlisted” security that is listed on a foreign market and is also listed on an Exchange.  

• 2“Marketplace” is defined in UMIR as (a) an Exchange; (b) a QTRS; and (c) an ATS (which is defined as an alternative trading system in National Instrument 21-101 - Marketplace Operation), and refers to a marketplace that is recognized by or registered with one or more Canadian securities regulatory authorities.
• 3See Rule 6.4(2)(d). Rule 6.4(3) qualifies that the exemption is unavailable to an order of a Canadian account denominated in Canadian funds that: (a) is part of an intentional cross; (b) is part of a pre-arranged trade; (c) is for more than 50 standard trading units; or (d) 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 the Order Protection Rule. In addition, certain provisions of UMIR continue to apply to a Participant entering the order, such as Rule 2.1 of UMIR 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. (See also IIROC Notice 13-0275 Republication of Proposed Consolidation of IIROC Enforcement, Procedural, Examination and Approval Rules issued November 14, 2013, which proposes to  repeal Rule 2.1 of UMIR upon the introduction of a consolidated Standards of Conduct Rule 1400 in conjunction with the Dealer Member Rules.) The exemption for an off-marketplace trade involving a non-Canadian account provided in clause (e) of Rule 6.4(2) would not be available 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 it was noted the FORM definition excluded the bulletin board then known as “Pink Sheets” as well as the OTC Bulletin Board outside of the then NASD operating hours and certain reporting facilities then 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.  Pursuant to FINRA Rule 4552  weekly aggregated trade data is reported by ATSs and is available for all equities (NMS Tier 1, NMS Tier 2, and OTC Equities).
• 7Participants may refer to the SEC’s “ATS list” updated periodically here.