Securities Trading on Marketplaces in U.S. and Canadian Currencies

1. Summary

This Guidance Note provides guidance on the obligations of a Participant or Access Person under UMIR with respect to trading activity in a security that trades in both Canadian and U.S. currency on Canadian marketplaces. Generally, trades in a security denominated in Canadian currency will be treated as if the trades were made in a distinct security from trades denominated in U.S. currency for the purpose of determining acceptable arbitrage activity, the last sale price, best ask price and best bid price. However, trading activities in both currencies may be aggregated to determine whether the security qualifies as a “highly-liquid security”.

UMIR defines a marketplace as having the same meaning as set out in section 1.1 of CIRO’s By-law No. 1.2

2. Background

Some Canadian marketplaces have provided for the trading of certain listed securities in both Canadian and U.S. currencies. The trading symbol used for a security trading in U.S. currency is typically the symbol used for Canadian currency followed by the symbol extension or suffix “.U”. Generally, the same trading options and features are available for securities trading in U.S. currency as are available to securities trading in Canadian currency.

3. UMIR Obligations

3.1 Arbitrage Activity

An “arbitrage account” is defined in UMIR in part as including an account in which the holder makes a usual practice of buying and selling securities or derivatives “in different markets” to take advantage of differences in prices available “in each market”.

Legitimate arbitrage activity occurs where one seeks to profit from differences in price where the same security is traded on two or more markets and, at a particular moment, the price on the two markets is different after currency conversion is taken into account. If a security trades on a Canadian marketplace in both Canadian and U.S. currencies, CIRO will consider a Participant or Access Person to be engaging in legitimate arbitrage activity where the Participant or Access Person treats the Canadian dollar book and the U.S. dollar book of the marketplace as “different markets” for the purposes of arbitrage activity.

3.2 Highly-Liquid Securities and Trading During Certain Securities Transactions

Rule 7.7 of UMIR governs the activities of Participants, issuers and others in connection with trading activity in a security during the period of time that certain transactions involving the issuance of that security or a related security are being undertaken including: a distribution of securities; a securities exchange take-over bid; an issuer bid; an amalgamation; an arrangement; a capital reorganization or similar transaction. Rule 7.7 permits certain acceptable activities and otherwise restricts trading activities by persons with an interest in the outcome of the distribution of securities or other transactions.

Under Rule 7.7, a “highly-liquid security” is exempt from certain restrictions and prohibitions governing trading activity during securities transactions. A “highly-liquid security” is defined as a listed security or quoted security that:

• has traded, in total, on one or more marketplaces as reported on a consolidated market display during a 60-day period ending not earlier than 10 days prior to the commencement of the “restricted period”:
  • an average of at least 100 times per trading day, and
  • with an average trading value of at least $1,000,000 per trading day; or
• is subject to Regulation M under the Securities Act of 1934 (United States) (“Reg M”) and is considered to be an “actively-traded security” under that regulation.

CIRO maintains a list of securities which, based on data available to CIRO, meet the definition of a “highly-liquid security”. The list maintained by CIRO does not contain listed securities or quoted securities that are inter-listed with a market in the United States and that are considered to be “actively-traded” under Reg M but which fail to meet the tests for average daily trades and average daily trading value on Canadian marketplaces. A list of highly-liquid securities is prepared by CIRO for each trading day. Persons may rely on the list prepared by CIRO or they may independently verify if a security meets the requirements of a “highly-liquid security” so long as they retain a record of the data they rely upon in verifying the requirements. The list of highly-liquid securities is available on the CIRO website.3

If a security is traded on marketplaces in both Canadian and U.S. currencies, the trading activity in both currencies may be aggregated to determine whether the security meets the definition of a “highly-liquid security” for the purpose of the exemption from the requirements in Rule 7.7. If a security is traded on Canadian marketplaces in both currencies and the security is on the list of “highly-liquid securities” maintained by CIRO, that status applies to the security regardless of the currency in which the trade is made.

3.3 “Last Sale Price”, “Best Ask Price”, and “Best Bid Price”

UMIR contains a number of rules which reference the “last sale price” and/or the “best ask price” or “best bid price”. In each case, this price is determined by reference to order or trade information contained in “a consolidated market display”.

If a security is traded in both Canadian and U.S. currencies on a marketplace, the Participant or Access Person must, in effect, treat the security in each currency as a distinct security for the purposes of determining the “last sale price”, “best ask price” or “best bid price”. For example, if issuer ABC trades on a marketplace with orders and trades reported in Canadian currency under the symbol “ABC” and with orders and trades reported in U.S. currency under the symbol “ABC.U”, then the “last sale price”, “best ask price” or “best bid price” of:

• security “ABC” is determined by reference only to the sales, asks and bids of “ABC” in Canadian currency; and
• security “ABC.U” is determined by reference only to the sales, asks and bids of “ABC.U” in U.S. currency.

4. Applicable Rules

UMIR Rules this Guidance Note relates to:

• UMIR 1.1
• UMIR 7.7

5. Previous Guidance Note

This Guidance Note replaces:

• Market Integrity Notice 2005-026 – Securities Trading on Marketplaces in U.S. and Canadian Currencies (July 28, 2005).

• 2

  CIRO By-law No. 1 defines a marketplace to mean:

  1. a recognized exchange or a commodity futures exchange registered in a jurisdiction of Canada;
  2. a recognized quotation and trade reporting system; or
  3. a person or company not included in clause (a) or (b) above that facilitates the trading of securities or derivatives in a jurisdiction of Canada; and
     1. constitutes, maintains or provides a market or facility for bringing together buyers and sellers of securities or derivatives;
     2. brings together the orders for securities or derivatives of multiple buyers and sellers; and
     3. uses established non-discretionary methods under which the orders interact with each other, and the buyers and sellers entering the orders agree to the terms of a trade.
• 3

  The list of highly liquid securities can be found at: Highly Liquid Stocks