Reminder Regarding the Reporting of Extended Failed Trades

11-0161
Type: Rules Notice> Guidance Note
Rule connection:
UMIR
7.10 Extended Failed Trades
7.11 Variation and Cancellation and Correction of Trades
Distribute internally to:
Trading
Legal and Compliance

Contact:

James E. Twiss
Vice President, Market Regulation Policy
Telephone:
Email:

Executive Summary

This Rules Notice provides a reminder that the requirement to provide a report of an Extended Failed Trade (“EFTR”) to the Investment Industry Regulatory Organization of Canada (“IIROC”) will be implemented on June 1, 2011 for all trades executed on a marketplace that settle through the continuous net settlement facilities (“CNS”) of CDS Clearing and Depository Services Inc. (“CDS”).

In order to be able to test the EFTR System on or before May 27, 2011 or to file an EFTR with IIROC on or after June 1, 2011, a Participant or Access Person must set up an administrator by forwarding to [email protected] the following information:

  • name of the Participant or Access Person;
  • address of the Participant or Access Person;
  • name of the person designated to be the administrator for the EFTR system for the Participant or Access Person; and
  • e-mail address of the person designated to be the administrator.

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 marketplace3 that 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.4

  1. 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.

  1. 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. In order to set up an administrator for the EFTR System, the Participant or Access Person must forward to [email protected] the following information:

  • name of the Participant or Access Person;
  • address of the Participant or Access Person;
  • name of the person designated to be the administrator for the EFTR System for the Participant or Access Person; and
  • the e-mail address of the person designated to be the administrator.

Generally, a Participant or Access Person will designate only one person to be the administrator for the EFTR System. The administrator will be able to set up persons to be “reporters” on behalf of the Participant or Access Person. Reporters have the same privileges as administrators but are not able to add other users or reporters.

If you wish to access the EFTR System in the test environment, please contact [email protected] for assistance.

  1. 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.

In order to be able to file an EFTR with IIROC on or after June 1, 2011, a Participant or Access Person must have set up an administrator with IIROC. See Question 3 for the information and procedure for setting up an administrator.

If you have any questions regarding the procedure for filing an EFTR, please contact [email protected] for assistance.

  1. 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 on and after Friday, May 20, 2011, initially through the test facilities.

  1. 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.

  1. What are the obligations of a Participant that acts as a carrying broker?

UMIR applies only to those dealers which are Participants (members of an exchange, users of a quotation and trade reporting system or subscribers to an ATS). If the records maintained by the Participant (in respect of its own clients or the clients of an introducing dealer for which the Participant acts as carrying broker) indicate that there has been a failed trade for which an ETTR should be filed, the Participant will have the obligation to file such report with IIROC through the EFTR System. If the introducing dealer is itself a “Participant”, then the introducing dealer and the carrying broker will determine which one of them will file the EFTR.

  • 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 May 19, 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”).
  • 4A report will not be required in respect of an Extended Failed Trade in an inventory account. In the ordinary course, activity in an inventory account is subject to extensive review during an examination of the Participant by the Trading Conduct Compliance Department of IIROC.