Background

Securities regulators generally have a concern regarding the relationship between the occurrence of failed trades and preservation of market integrity.  In order to ensure that IIROC has sufficient information to evaluate whether trading activity that resulted in a failed trade has been conducted in compliance with UMIR and other regulatory requirements, amendments were made to the Universal Market Integrity Rules (“UMIR”), effective October 15, 2008, that introduced as Rule 7.10 a requirement that each Participant or Access Person is required to report to IIROC if a trade that was executed on a marketplace has failed to settle on the settlement date and remains unresolved 10 trading days following the settlement date (“Extended Failed Trade”).  The implementation of the requirement to file an EFTR report was deferred and will become effective for certain Extended Failed Trades on June 1, 2011, concurrent with the introduction of the filing requirements for the reports of a “Trade Variation or Cancellation”.1

These reports of Extended Failed Trades will allow IIROC to determine if the trade has failed to settle for an “improper” reason (for example, if a sale had been executed as an undeclared short sale).  Once an initial report of an Extended Failed Trade had been filed with IIROC, the Participant or Access Person will be required to provide updates on the status of the fail (for example, if the volume of the fail is reduced), and ultimately to file a final report once the account has cured the default.  This reporting regime will put IIROC in a position to monitor trends in Extended Failed Trades, including the steps which a Participant or Access Person may be taking to rectify the default.  Information from the reports will be used by IIROC in making a determination whether a particular security should be designated as a “Short Sale Ineligible Security”.2

Questions and Answer

The following are questions relating to the obligation of a Participant or Access Person to file an EFTR and IIROC’s response to each question:

1. As of June 1, 2011, will an EFTR be required in respect of every Extended Failed Trade?

No.  As of June 1, 2011, an EFTR will be required ONLY for a trade of a listed security executed on a marketplace3that settles through the CNS facilities of CDS.  For a Participant, this will mean that there will be an obligation to report instances of an Extended Failed Trade in a Cash Account or a Long Margin Account.

2. Will an EFTR be required for an Extended Failed Trade using the “Trade-for Trade” facility of CDS?

Not as of June 1, 2011.  With respect to trades using the “Trade-for-Trade” settlement facility of CDS (which generally represents less than 10% of trades in listed equity securities), the requirement to file an “Extended Failed Trade” report will become effective at a future date once IIROC has completed the programming necessary to allow IIROC to receive directly from CDS information on extended fails in the “Trade-for-Trade” settlement facility of CDS.  IIROC will issue a Rules Notice setting out the date that reports of Extended Failed Trades in the “Trade-for-Trade” facility will become effective at least ninety (90) days prior to the implementation date.

3. Will a Participant or Access Person be able to test their access to the EFTR System prior to the implementation date?

Yes.  A number of Participants have already helped test the EFTR System during development.  A “test” environment will be available for Participants to test their access and file upload for a test period starting on Wednesday, May 11, 2011 and ending on Friday, May 27, 2011.  Users wishing to access the EFTR System during the test period must provide IIROC with contact information for their administrator by Friday, May 6, 2011.

If you wish to access the EFTR System in the test environment, please contact eftrs@iiroc.ca for assistance. 

4. If a Participant or Access Person has an obligation to file an EFTR, how and when should be EFTR be filed with IIROC?

The report is filed through the use of the EFTR System available on the IIROC website.  If a trade that was executed on a marketplace has failed to settle on the settlement date and remains unresolved 10 trading days following the settlement date, the initial report would be made on the next trading day.  The EFTR System has been designed to allow a Participant to enter each Extended Failed Trade “on the screen” or to “upload” a file containing the required information of each Extended Failed Trade.

IIROC has prepared the “Extended Failed Trade Reporting System (EFTRS) User Guide, a draft copy of which will be provided to the person designated as the administrator by the Participant or Access Person.  The final version of the User Guide will be available prior to May 6, 2011.

If you have any questions regarding the procedure for filing an EFTR, please contact eftrs@iiroc.ca for assistance. 

5. Will training on the EFTR System be made available to Participants and Access Persons?

Yes.  IIROC will be providing a webcast training session on how to access and use the EFTR System.  This training will be made available concurrent with the start of the test period on Wednesday, May 11, 2011.  A Notice will be issued informing Participants and Access Persons how to access this webcast prior to its launch.

6. Will IIROC contact a Participant or Access Person that has filed an EFTR?

After an EFTR has been filed, IIROC may inquire of a Participant or Access Person as to whether additional steps had been taken to resolve the failed trade since the filing of the initial report or to obtain additional information on the reason for the initial failure.  In making such requests, IIROC relies on its general investigative power under Rule 10.2 of UMIR in the same manner as IIROC does in a review or investigation of other trading activity.

• 1IIROC Notice 11-0079 - Rules Notice – Guidance Note – UMIR – Implementation Date for the Reporting of Trade Variations and Cancellations (February 25, 2011).
• 2See “Short Sale Ineligible Security” on pages 27 to 29 of IIROC Notice 11-0075 - Rules Notice – Request for Comments – UMIR – Provisions Respecting Regulation of Short Sales and Failed Trades (February 25, 2011).
• 3As of February 25, 2011, the term “marketplace” for the purposes of UMIR includes:  the Toronto Stock Exchange; TSX Venture Exchange; Canadian National Stock Exchange (including its “Pure Trading” facility);Alpha Trading Systems (“Alpha”), Bloomberg Tradebook Canada Company, Chi-X Canada ATS Limited (“Chi-X”), Liquidnet Canada Inc. (“Liquidnet”), Omega ATS Limited (“Omega”) and TriAct Canada Marketplace LP (the operator of “MATCH Now”).