On June 28, 2017, the applicable securities regulatory authorities approved amendments to UMIR and the Dealer Member Rules (DMR) that consolidate existing UMIR best execution requirements and DMR requirements for fair pricing of over-the-counter (OTC) securities into a single rule on best execution (Amendments). Among other things, the Amendments:
- introduce a definition for “foreign exchange-traded security”
- modify the best execution obligation to explicitly require a Dealer Member to establish, maintain and ensure compliance with written policies and procedures that are reasonably designed to achieve best execution when acting for a client
- require each Dealer Member to ensure its employees involved in the execution of client orders know and understand the application of the Dealer Member’s best execution policies and procedures
- prohibit policies and procedures that include the practice of sending client orders in bulk to a foreign intermediary for execution outside of Canada without considering other liquidity sources, including those in Canada.
On December 10, 2015 IIROC published for comment proposed best excecution changes in IIROC Notice 15-0277 - Proposed Provisions Respecting Best Execution and proposed guidance in IIROC Notice 15-0278 - Proposed Guidance Respecting Best Execution. In response to comments received and further industry consultation, we re-published proposed rule changes for comment on October 13, 2016 in IIROC Rules Notice 16-0233 – Re-publication of Proposed Provisions Respecting Best Execution (2016 Proposed Amendments) and proposed guidance in IIROC Notice 16-0234 - Re-publication of Proposed Guidance Respecting Best Execution (2016 Proposed Guidance). All relevant background information, including the description and impact of the Amendments, is set out in these Notices.
We have made a few non-material changes to the 2016 Proposed Amendments and 2016 Proposed Guidance in response to comments received and further industry consultation. The changes to the 2016 Proposed Amendments are marked in the blackline found in Appendix C and the changes to the 2016 Proposed Guidance are described below.
The Amendments are effective on January 2, 2018.
We received six comment letters in response to IIROC Notices 16-0233 and16-0234. Appendix C provides a summary of the public comments received and our responses.
Description of Non-Material Changes to 2016 Proposed Amendments
The Amendments, as approved, vary slightly from the 2016 Proposed Amendments. Non-material changes were made to subsection 3300.3(b) and 3300.11(c)(xi)(C) to correct typographical errors in the 2016 Proposed Amendments. We also modified the required time to retain records of best execution policies and procedures reviews, as well as any material decisions made and changes to them, from five to seven years in order to be consistent with other record retention requirements in the Dealer Member Rules. These changes are highlighted in the comment summary found at Appendix C.
Description of Non-Material Changes to 2016 Guidance
We made the following non-material changes to the 2016 Proposed Guidance:
- reflected the requirement to retain records of best execution policies and procedures reviews, as well as any material decisions made and changes to them, for seven years
- added “accessing the marketplace directly” as an additional option that a Dealer Member may consider if a particular unprotected marketplace has demonstrated a reasonable likelihood of liquidity for securities for which the Dealer Member accepts orders
- modified the wording in question 20 to clarify that the expectation for a Dealer Member to monitor for trading opportunities on marketplaces that operate outside the core trading hours and migrate client orders when they can execute with orders displayed on marketplaces that are still open only arises if the Dealer Member has adopted a policy to migrate client orders
- added language in question 22 to clarify that the question is with respect to whether an Executing Dealer Member is expected to provide input into order routing management for client orders in order to comply with its best execution obligation.
Final guidance respecting best execution is being published concurrently with this Notice and can be found at IIROC Notice 17-0138 – Guidance Respecting Best Execution.
The Amendments come into force on January 2, 2018, being 180 days after the publication of this Notice.
As mentioned in IIROC Notice 15-0277, IIROC will withdraw its proposal regarding the dark rules anti-avoidance provision that was published in IIROC Notice 15-0023 – Re-publication of Proposed Dark Rules Anti-Avoidance Provision upon implementation of the Amendments.