Transaction Reporting for Debt Securities

14-0250
Type: Rules Notice> Notice of Approval
Rule connection:
Legacy DMR Rules
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Mike Prior
Vice President, Market Regulation
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Naomi Solomon
Senior Policy Counsel, Market Regulation Policy
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Executive Summary

On October 29, 2014, the applicable securities regulatory authorities approved Dealer Member Rule 2800C  – Transaction Reporting for Debt Securities (“Rule 2800C”)1 .  This follows IIROC’s re-publication for comment of Proposed Requirements for Debt Securities Transaction Reporting (“Proposed Rule 2800C”)2 .

Rule 2800C sets out a framework under which Dealer Members are required to report debt securities transactions to IIROC through the Market Trade Reporting System 2.0 (“MTRS 2.0”). All over-the-counter (“OTC”) debt market transactions executed by a Dealer Member, including those executed on an Alternative Trading System (“ATS”) or through an Inter-Dealer Bond Broker (“IDBB”)3 , must be reported to IIROC on a post-trade basis. Dealer Members are also responsible to report transactions of their affiliates that are Government Securities Distributors (“GSDs”) to IIROC. Transaction information reported under Rule 2800C will enable IIROC to undertake surveillance and oversight of OTC debt market trading. IIROC will also continue to publish aggregate debt trading statistics, consistent with its current practice.

At this time, IIROC will retain the ‘Customer LEI’ and Customer Account Identifier as optional fields (that is, these are not mandatory fields even when information is available). However, it is anticipated that the Bank of Canada and IIROC will re-visit this requirement within two years following the effective date of Phase 1 of Rule 2800C. Any proposal to make these fields mandatory would be subject to consultation with the industry. A Dealer Member that chooses to report the Customer LEI in this optional field should, prior to reporting, ensure that its customer has authorized the Dealer Member to provide the Customer LEI to IIROC. A Dealer Member that is a GSD and chooses to report the Customer LEI in this optional field should, prior to reporting, ensure that its customer has authorized the Dealer Member to provide the Customer LEI to IIROC and Bank of Canada.  

Some Dealer Members may incur significant technology costs associated with the transition from reporting debt market activity to Bank of Canada’s Market Trade Reporting System (“MTRS”), to IIROC’s MTRS 2.0. IIROC is of the view that these costs are not disproportionate to the benefits that will be afforded to Dealer Members from improved efficiency of data collection and standardization of reporting; and to the market with robust oversight to strengthen the fairness and integrity of the debt market. The costs that IIROC will incur to operate and maintain MTRS 2.0, including technology, staff and other direct costs, will be allocated to Dealer Members on a cost-recovery basis.  A cost-recovery fee model is currently under development in consultation with Dealer Member representatives and will be published for comment in late 2014.

Dealer Member responsibilities under Rule 2800C will be implemented in two phases. Phase 1 is effective on November 1, 2015. In Phase 1, a Dealer Member that, on or after the effective date of November 1, 2015:

  • is a GSD and participant in MTRS must comply with Rule 2800C by reporting all of their transactions and the transactions of any affiliate that is a GSD, in Debt Securities (including all Repo transactions) denominated in Canadian dollars; or 
  • has an affiliate that is a GSD and participant in MTRS, must comply with Rule 2800C by reporting the transactions of the affiliate, in Debt Securities (including all Repo transactions) denominated in Canadian dollars.  

All other Debt Security transaction reporting by GSD and non-GSD Dealer Members will be implemented when Phase 2 comes into effect, which is expected to be on November 1, 2016.

  • 1The text of Rule 2800C is attached as “Appendix A”.
  • 2See IIROC Notice 14-0004 issued January 9, 2014. In response to comments received from the public and the Canadian Securities Administrators (the “CSA”), IIROC has made revisions to Proposed Rule 2800C which are summarized in section 4 of this Notice of Approval. A copy of black-line revisions to Proposed Rule 2800C together with IIROC’s responses to public comments is attached as “Appendix B”.
  • 3IDBB is defined in Rule 2100 as an organization (whether or not incorporated) that provides information, trading and communications services in connection with trading in domestic debt securities among customers of the organization.
Table of contents
  1. Background Information

IIROC notices requesting comments on Proposed Rule 2800C4  have summarized the history leading to Rule 2800C, outlined standards for debt market regulatory reporting in other jurisdictions and discussed IIROC’s Debt Market Surveillance Project.

  1. IIROC’s MTRS 2.0

To date, standardized reporting of debt market activity in Canada has been provided to the Bank of Canada by GSDs5  in weekly aggregate statistical reports submitted through the MTRS. Weekly statistics have been required from GSDs in order for the GSDs to participate in Government of Canada securities auctions and these statistics have been used by Bank of Canada to produce quarterly reports as well as in the management of government securities auctions.

IIROC’s system for reporting debt securities transactions, referred to as “MTRS 2.0”, serves as the successor to the MTRS. Rule 2800C requires that all GSD OTC debt market transactions are reported to IIROC’s MTRS 2.0. The data received will be shared by IIROC with the Bank of Canada, obviating the need for GSDs to submit weekly aggregate reports of the same transactions. IIROC will continue to publish aggregate debt trading statistics, consistent with its current practice.

  1. MTRS 2.0 User Guide

In order to facilitate accurate transaction reporting by Dealer Members, IIROC has developed the MTRS 2.0 User Guide (“User Guide”), which contains technical and explanatory information such as message specification, file delivery protocol, data formats and reporting procedures.

IIROC has worked with Dealer Members to develop the User Guide.  A draft was provided to operations and technology personnel of the Dealer Members for their review as part of the consultation process. IIROC intends to publish the final User Guide.

  1. Regulatory Objectives

IIROC’s priorities in conducting oversight of debt market trading are to strengthen the fairness and integrity of the debt markets, and to ensure compliance and prevent and/or address identified abuses in areas such as:  

  • best execution and fair pricing;
  • front running (use of information to trade ahead of client bond trades or issuances);
  • insider trading;
  • manipulation of the price of a debt market instrument or class of instruments; and
  • suitability of a specific instrument types (particularly with respect to retail customers).

The data elements that must be reported under Rule 2800C serve to facilitate IIROC’s market surveillance and monitoring capabilities to meet these regulatory objectives.

  1. IIROC Debt Market Reporting Requirements

Dealer Members are required to report transactions to IIROC on T+1 for all OTC transactions in Debt Securities (as defined in section 1.1 of Rule 2800C), including those executed on an ATS or through an IDBB. For transactions between two Dealer Members, both Dealer Members are required to submit a trade report. A Dealer Member is also responsible to report to IIROC transactions of its affiliates that are GSDs.

Dealer Members must report transaction information promptly, accurately and completely, including the data elements as specified in Rule 2800C. A third-party agent may be retained by the Dealer Member for the purpose of submitting transaction information; however, the Dealer Member remains responsible for timely, accurate and complete reporting in compliance with Rule 2800C.

At this time, IIROC will retain the ‘Customer LEI’ and Customer Account Identifier as optional fields (that is, these are not mandatory fields even when information is available). However, it is anticipated that Bank of Canada and IIROC will re-visit this requirement within two years following the effective date of Phase 1 of Rule 2800C. Any proposal to make these fields mandatory would be subject to consultation with the industry. While use of Legal Entity Identifiers (“LEIs”) is not yet widespread in Canada, the global regulatory community is rapidly adopting this standard and its benefits will be realized through collective efforts. IIROC intends to undertake industry education programs as necessary to inform Dealer Members on the adoption of LEIs. A Dealer Member that chooses to report the Customer LEI in this optional field should, prior to reporting, ensure that its customer has authorized the Dealer Member to provide the Customer LEI to IIROC. A Dealer Member that is a GSD and chooses to report the Customer LEI in this optional field should, prior to reporting, ensure that its customer has authorized the Dealer Member to provide the Customer LEI to IIROC and Bank Of Canada.  

  1. Summary of Changes to Proposed Rule 2800C

IIROC staff has considered all of the comments received in response to the republication of Proposed Rule 2800C. To address CSA and public comments received, Rule 2800C as approved varies from Proposed Rule 2800C as IIROC has made some minor revisions as follows:

  • Provisions revised for clarity and/or consistency:
    • Section 1 definitions of “Authorized Agent”, “Debt Security” and “Repurchase Agreement” (Repo) are revised for greater clarity;
    • Subsection 2.1(b) is revised to clarify that exceptions to the general transaction reporting requirement must not be reported;
    • Subsection 2.1(b)(v) is added to confirm that a transaction must not be reported if the counterparty is Bank of Canada or Bank of Canada on behalf of the Government of Canada;
    • Subsection 2.1(b)(vi) is added to confirm that affiliates that are GSDs only for Government of Canada treasury bills must not report a transaction, other than a Repo transaction, in Debt Securities with an original term to maturity of greater than one year;
    • Subsections 2.2(a) and (b) are revised to clarify common reporting responsibilities including transactions between Dealer Members and non-clients or issuers; 
    • Section 2.3 is revised to clarify that the Dealer Member is responsible for compliance with Rule 2800C if it uses an Authorized Agent;
    • Subsection 2.4(b) is revised to clarify a Dealer Member’s obligations respecting the  Legal Entity Identifier (“LEI”) and to eliminate duplication of LEI data elements in section 2.4(c);
    • Subsection 2.4 (c) is revised to clarify that each transaction report must contain the data elements relevant to a bond or Repo transaction as applicable;
    • Subsection 2.4(c) contains a revised description of ‘Customer LEI’ to confirm that it is optional and only reportable for institutional customers;
    • Subsection 2.4(c) contains a revised description of ‘Related Party Indicator’ to clarify the scope of the data element and to facilitate accurate reporting;
    • Subsection 2.4(c) contains a revised description of ‘Counterparty Type’ to   include the identification of non-client and issuer counterparties and facilitate accurate reporting;
    • Subsection 2.4 (c) contains a revised description of ‘Counterparty Identifier’ for clarity and to remove the reference to Bank of Canada which is not applicable;
    • Subsection 2.4(c) contains a revised description of ‘Non Resident Indicator’ to clarify that the data element is required for a non-resident counterparty;
    • Subsection 2.4(c) contains a revised description of ‘Repo Collateral Security Type’ removing the phrase ‘(not general collateral)’ for clarity
    • Section 3(a) is revised to clarify that enrollment is required for a Dealer Member or  an Authorized Agent that will submit transaction reports to MTRS 2.0; and
  • Subsection 2.4(c) no longer contains the ‘Repo Indicator’ data element given comments received respecting limitations on Dealer Member systems.
  1. Rule-making Process

IIROC issued two requests for comment on Proposed Rule 2800C before approval of final Rule 2800C. As part of the rule development process, IIROC staff consulted with a number of Dealer Member representatives, both individually and collectively, that represent the majority of debt market trading activity in Canada, as well as IIROC’s Fixed Income Committee, IIAC’s Repo and Debt Markets Committees and the Bank of Canada. The objectives of these consultations included addressing Dealer Members’ specific concerns, ensuring that Rule 2800C is reasonable in scope and operationally achievable, and to inform certain revisions to Proposed Rule 2800C. In general, most firms were supportive of the objectives of the project and also saw benefits to be derived for the industry.

  1. Impacts

IIROC has consulted with Deler Members that have confirmed that existing trade capture systems can be leveraged to create transaction files suitable for transmission to IIROC’s MTRS 2.0. Dealer Members also confirmed during industry consultation regarding the collection and reporting of required trade data, that the majority of data elements are available in existing sources generally but work would be required, in some cases, to merge data elements from disparate systems. To facilitate reporting, Dealer Members may submit multiple files and/or report trades through an Authorized Agent.

Some Dealer Members may incur significant technology costs associated with the transition from MTRS to MTRS 2.0 for the purposes of Rule 2800C. IIROC is of the view that these costs are not disproportionate to the benefits that will be afforded to Dealer Members from the improved efficiency of data collection and standardization of reporting; and to the market with robust oversight to strengthen the fairness and integrity of the debt market. Rule 2800C does not therefore impose costs on, or restrict the activities of, market participants (including Dealer Members and non-Dealer Members) that are disproportionate to the benefits of the regulatory objectives sought to be realized.

The costs to IIROC associated with the ongoing operation and maintenance of MTRS 2.0, including technology, staff and other direct costs, will be allocated to Dealer Members on a cost-recovery basis. A cost-recovery fee model will be developed separately, based on extensive input from a committee IIROC has established of diverse Dealer Member representatives. IIROC intends to publish the proposed fee model for comment in late 2014.

  1. Approval and Implementation Plan

  2. Phases

Dealer Member responsibilities under Rule 2800C are to be phased in based on: (i) the Dealer Member’s participation in the current MTRS; (ii) the types of Debt Securities traded; and (iii) the type of transaction, as follows.

Phase 1

Phase 1 is effective on November 1, 2015. In Phase 1, a Dealer Member that, on or after the effective date of November 1, 2015:

  • is a GSD and participant in MTRS must comply with Rule 2800C by reporting all of their transactions and the transactions of any affiliate that is a GSD, in Debt Securities (including all Repo transactions) denominated in Canadian dollars; or 
  • has an affiliate that is a GSD and participant in MTRS, must comply with Rule 2800C by reporting the transactions of the affiliate, in Debt Securities (including all Repo transactions) denominated in Canadian dollars.  

Phase 2

Phase 2 of the implementation of Rule 2800C is expected to become effective on November 1, 2016. In Phase 2, a Dealer Member that, on or after the effective date of Phase 2:

  • is a GSD and participant in MTRS must comply with Rule 2800C by reporting all of their transactions and the transactions of any affiliate that is a GSD, in Debt Securities (including all Repo transactions), including transactions that are not denominated in Canadian dollars; or
  • has an affiliate that is a GSD and participant in MTRS, must comply with Rule 2800C by reporting the transactions of the affiliate, in Debt Securities (including all Repo transactions) including transactions that are not denominated in Canadian dollars.  

All other Dealer Members must comply with Rule 2800C with respect to all of their transactions in Debt Securities (excluding Repo transactions), including transactions that are not denominated in Canadian dollars.

  1. Transition of MTRS

The MTRS and MTRS 2.0 systems will run in parallel for a period of time to ensure data integrity and pending development of new volume and statistics reports, following which Bank Of Canada and IIROC will sign off on MTRS 2.0 and de-commission MTRS. In addition, a new MTRS 2.0 trade classification manual will be developed.

  1. Attachments

Appendix  A  –   Rule 2800C – Transaction Reporting for Debt Securities

Appendix B – Black-line reflecting revisions to Proposed Rule and Response to Public Comments