IIROC regularly reviews trading firms' trade-desk procedures. The reviews are intended to assess whether trade desk procedures comply with the Universal Market Integrity Rules (UMIR) and appropriate provincial regulatory requirements. The department’s work contributes to market integrity regarding activity that could adversely affect the marketplace or disadvantage investors.
Risk Assessment Model
The Trading Conduct Compliance Risk Assessment Model is a risk management tool to help identify, define, assess and “weigh” risks in respect to IIROC Dealer Members, who are also marketplace participants, to determine priority focus in the Trading Conduct examination cycle of Dealer Members. The model gives an indication of the comparable risk assessment for each Dealer Member relative to all firms and relative to other in a Peer Group, who are also marketplace participants.
The objective of the TC Risk Assessment Model is to identify Dealer Members having a higher than average or lower than average probability of failing to maintain or uphold market integrity and/or comply with the requirements set out in the Universal Market Integrity Rules (UMIR). With this information, IIROC further ensures that its regulatory focus is placed on higher risk firms.
The model identifies three risk types, 6 risk categories and 17 specific risks. Each specific risk is assessed and weighted to determine an individual firm risk score.
The model then calculates the risk control score by identifying two risk control categories and three specific risk controls. Each specific risk control is assessed and weighted. Risk control is the method the firm uses to mitigate or reduce its trading risk. The higher the risk control score, the higher the quality of overall risk control.
The resulting risk control score is discounted and 40% of the score is subtracted from the trading risk score to achieve a residual risk score for each firm. The discount factor is applied consistently to all applicable Dealer Member risk control scores to better differentiate residual risk scores.
To assess financial and compliance risk, IIROC staff weigh various kinds of risk alongside the controls that firms use to manage that risk. In summary, the formula for the FinOps risk assessment model is as follows:
Residual Risk Score = Business Risk Score - [40% of Risk Control Score]
- Business Risk Weightings: Each risk type is assigned a fixed weighting to differentiate the level of its importance in the model; Inherent Risks have an aggregate weigthing of 76% and Internal Factors have an aggregate weighting of 24%.
- Residual Risk Rating: IIROC can assess a firm’s financial operations and compliance residual risk as low, moderate-low, moderate-high or high, compared to other dealer firms.
View a diagram of the assessment structure.
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Trading Conduct Compliance
Our Trading Conduct Compliance staff assist in the development, introduction and education of users on new rules and policies, such as the Supervision of Trading Policy (see Policy 7.1
for more detail). This policy requires all applicable market participants to proactively monitor their compliance by completing internal reviews and addressing deficiencies. An IIROC Trading Conduct Examiner will examine the results of these reviews when a field review is conducted at the trading firm's office.
We focus on making sure firms have the proper systems to prevent and detect violations of the Universal Market Integrity Rules, or UMIR. The most common deficiencies that examiners find are the firm having insufficient procedures, missing quarterly reports and having incomplete audit trails.
When examiners discover problems, IIROC calls on the firm to correct them. If something manipulative or deceptive is detected, the matter is referred to Trading Review and Analysis for further review. The Trading Review and Analysis group will then review the data looking for infractions such as manipulation or frontrunning, which is when a dealer or registered individual trades ahead of his or her client, or short selling violations.
Where disciplinary action is required, the matter is then referred on to Enforcement. Learn more in How We Review & Analyze Trading
in the Market Monitoring & Analysis section. Need to know more? Dealer member firms seeking more information on Trading Conduct Compliance can contact IIROC: Mike Prior, Vice President, Surveillance [email protected]
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