R Rules Notiice N Notice of Approval A U UMIR C Contact: James E. Twiss C Chief Market Policy Adviser T Telephone: 416.646.7277 4 7 FFax: 416.646.7265 e e-mail: [email protected] Pleasee distribute intternally to: Legal and Co ompliance Trading 12-0363 Decemberr 7, 2012 P Provisio ons Resp pecting Electron E nic Trading E Executive Summary y O On Decemb ber 7, 2012 2, the applicable securrities regulaatory autho orities apprroved amen ndments ((“Amendments”) to UMIR U respeccting certain requirem ments for electronic traading on C Canadian 1 m marketplace es. T The Amend dments, which are effe ective Marcch 1, 2013 3: 1 onic Trading g and its n the requirrements of UMIR to Na ational Insttrument 23-103 Electro align Com mpanion Pollicy (“ETR”)); expa and the exiisting supe ervisory req quirementss for tradin ng to speciifically include the estab blishment and a mainte enance of riisk manageement and supervisorry controls, policies and proceduress related to o access to o one or m more markeetplaces and d/or the usse of an er system; automated orde Reference sh hould be made to IIROC Notice 12-0200 – Rule es Notice – Requ uest for Commen nts – UMIR – Pro ovisions Respectin ng Electronic Trading (Jun ne 28, 2012) witth which the pro oposed amendm ments were pub lished for publicc comment (the “Proposed Ame endments”). d the responses of IIROC. Column 1 of the See Append dix B for the sum mmary of comme ents received on n the Proposed A Amendments and table highlig ghts the changess made to the Am mendments as ap pproved from thee Proposed Ame ndments. IIROC Notice 12--0130 – Rules Notice N – Notice of o Approval – UMIR U – Provision ns Respecting EElectronic Tradin ng perm mit, in certa ain circumstances, a Participantt to authorize an inv vestment d dealer to perfo orm on its behalf the setting or adjustmen nt of a risk managem ment or sup pervisory control, policy or o procedure by a written agreem ment; impo ose specificc gatekeep per obligattions on a Participaant who h has authorrized an invesstment dea aler to pe erform on its behalff the settin ng or adju ustment o of a risk management or superviso ory control, policy or p procedure; umstances under which a trade may be ccancelled, v varied or co orrected clariffy the circu with notice to, or o the conssent of, a Market M Regu ulator; and make e several editorial e ch hanges or consequen c ntial amend dments to certain prrovisions inclu uding the in ncorporatio on into UMIR of define d terms useed in the ET TR. T The Amen ndments are a effective March 1, 2013. Howevver, IIROC C recognizzes that P Participants and Acccess Person ns may have significcant system ms work w with respecct to the iintroductio on, pursua ant to Partt 7 of Policcy 7.1, of automated d controlss to examin ne each o order befo ore entry on o a mark ketplace to t prevent the entryy of an orrder which h would rresult in: the Participan nt or Acce ess Person n exceedin ng pre-dettermined credit or capital thressholds; a cllient of th he Particip pant exce eeding pre e-determin ned creditt or otherr limits assig gned by the Participa ant or to th hat client; or the Participan nt, Accesss Person or client of the P Participantt exceedin ng preermined lim mits on the value orr volume o of unexecu uted orders rs for a pa articular dete security or classs of securiities. W While IIRO OC expects that Particcipants an nd Access P Persons willl use bestt efforts to comply w with the requireme ents for automated d controls ls on tha at date, IIIROC willl allow P Participants and Acccess Perso ons until May 31, 2 2013 to ccomplete testing an nd fully iimplementt such auto omated co ontrols. Alll other requirementts of the A Amendmen nts must b be implem mented by Participant P ts and Acce ess Personss by March h 1, 2013. T The most significant im mpacts of th he Amendm ments are to o: ensu ure that Partticipants an nd Access Persons P ado opt, docum ment and maintain a sy ystem of risk management and supervisory s y controls, policies and proce edures reaasonably desig gned to manage m the risks asssociated w with electro onic tradin ng and acccess to markketplaces; ensu ure that Parrticipants and Access Persons aree effectively supervisiing trading g activity and are accoun nting for th he risks asssociated wiith electron nic access tto marketp places in theirr supervisorry and compliance mo onitoring prrocedures; and IIROC Notice 12--0363 – Rules Notice N – Notice of o Approval – UMIR U – Provision ns Respecting EElectronic Tradin ng 2 require an appropriate level of understandi ng, ongoing testing g and app propriate monitoring of any a automa ated order systems in n use by a Participant,, Access Pe erson, or c of the e Participan nt. any client O On October 25, 2012, the CSA issued prop posed amen ndments to o National Instrumentt 23-103 EElectronic Trading T rega arding asp pects of the e provision n of third-p party access to marke etplaces, 2 including direct d electtronic acce ess (“CSA Access Pro oposal”). Concurre ent with this CSA initiative, IIR ROC issued d additionall proposed amendmen nts to UMIR R regarding g third-partty access 3 tto marketpllaces (“Prop posed UMIR Access Am mendmentts”) that wiill: • align n UMIR witth the CSA A Access Pro oposal with h provision ns related tto direct electronic 4 acce ess provide ed by Particcipants to certain Canaadian registtrants and o other clientts; • intro oduce requ uirements fo or order ro outing arran ngements5 entered in nto by a Participant 6 with h investmen nt dealers, foreign f dea aler equivalents and o other Participants; and d • ame end or clarify provisions related to order exxecution seervices7 pre esently offe ered to a rang ge of client account ty ypes. 2 Published att (2012) 35 OSCB beginning at page p 9627. 3 IIROC Notice e 12-0315 - Rule es Notice – Reque est for Comments – UMIR – Provvisions Respecting g Third-Party Elecctronic Access to M Marketplaces (October 25 5, 2012), which includes prop posed amendments to Dealer Member Ruless 1300.1 and 3 3200 (the “Prop posed DMR Amendmentts) relating to a proposed suita ability exemption for clients pro rovided with dirrect electronic access and a pro ohibition on allowing clie ents of an orderr execution serviice to use an automated order ssystem or to maanually send ord ders that exceed the volume threshold se et by IIROC from time to time. 4 The Propose ed UMIR Access Amendments A wo ould define “dire ect electronic acccess” as an arra ngement between a Participant and a client that permitss the client to ele ectronically transmit an order con ntaining the iden ntifier of the Partiicipant: (a) through the systems off the Participant for f automatic on nward transmissio on to a marketplace; or (b) directly y to a marketplacce without being g electronically trransmitted throu ugh the systems of the Participan nt. 5 The Propose ed UMIR Access Amendments A wo ould define “rou uting arrangemen nt” as an arrang ement under wh hich a Participant permits an investment dealer d or foreign n dealer equivalent to electronica ally transmit an o order relating to a security: (a) through h the systems of the Participant fo or automatic onw ward transmissio on to: (i) a marketplace m to which w the Particip pant has access using the identifieer of the Participaant, or (ii) a fo oreign organized d regulated markket to which the e Participant has access directly o or through a deaaler in the other jurisdiction; or (b) directly y to a marketplacce using the iden ntifier of the Partticipant without being electroniccally transmitted d through the systems of the Particip pant. 6 The Propose ed UMIR Access Amendments A wo ould define a “fo oreign dealer equ uivalent” as “a p person registered d in a category aanalogous to that of inve estment dealer in a foreign jurisdiction that is a signatory to the Internationaal Organization of Securities Co ommissions’ Multilateral Memorandum of o Understanding g”. 7 ed UMIR Access Amendments A wo ould define “ord der execution serrvice” as a servicce that meets the e requirements, ffrom time to The Propose time, underr Dealer Memberr Rule 3200 – Minimum M Requirem ments for Dealerr Members Seekin ng Approval und der Rule 1300.1 ffor Suitability Relief for Tra ades Not Recomm mended by the Meember. IIROC Notice 12--0363 – Rules Notice N – Notice of o Approval – UMIR U – Provision ns Respecting EElectronic Tradin ng 3 R Rules Notiice - Table e of Conte ents 1 1. Backgro ound to the e Amendme ents ...........................................................................................5 1.1 Eleectronic Trad ding Rule .....................................................................................................5 1.1.1 Framew work for Reg gulation of Electronic E Trrading ................................................... 5 1.1.2 Requirements Appllicable to Marketplace M PParticipantss .......................................... 5 1.1.3 Requirements Appllicable to Usse of Autom mated Orderr Systems .............................. 6 M s ............................................................ 6 1.1.4 Requirements Appllicable to Marketplaces 1.2 Pree-existing Su upervision Obligations O for Electron nic Trading under UMIR R ......................... 7 2 2. Discusssion of the Amendmen A nts ..............................................................................................8 2.1 Tra ading Superrvision Oblig gations.................................................................................... 8 2.1.1 Risk Ma anagement and Supervvisory Contro ols, Policies and Proced dures ................... 8 2.1.2 Authorizzation to Seet or Adjust Risk Manag gement and d Supervisorry Controls, Policies and Pro ocedures ................................................................................................... 9 omated Ord der Systems ..........................................10 2.2 Specific Provissions Applicable to Auto 2.3 Va ariation, Can ncellation and a Correction of Tradees ..........................................................12 2.4 Ga atekeeper Ob bligations with w Respectt to Electron nic Trading ...........................................12 2.5 Ed ditorial and Consequenttial Amendm ments ........ ............................................................12 3 3. Summa ary of the Im mpact of th he Amendm ments ..................................................................... 13 4 4. Techno ological Imp plications and Implem mentation Pllan ....................................................... 14 A Appendix A - Text of Provisions Respecting g Electronicc Trading.............................................. 16 A Appendix B - Comments Receiv ved in Response to Ru les Notice 1 12-0200 - R Request for Comments - UMIR R - Provision ns Respectin ng Electronicc Trading ............................. 24 IIROC Notice 12--0363 – Rules Notice N – Notice of o Approval – UMIR U – Provision ns Respecting EElectronic Tradin ng 4 1 1. Back kground to t the Am mendments 1.1 Electron nic Trading g Rule 1.1.1 Frramework fo or Regulatio on of Electro onic Trading g T The ETR inttroduces a comprehe ensive fram mework dessigned to aaddress are eas of conccern and rrisks broug ght about by electro onic trading. Generrally, the EETR places responsib bility for m managing risks and maintaining supervisory contro ols, policiess and proccedures related to e electronic trading on: a “m marketplace e participa ant” (defined as: a member of an excchange; usser of a Quottation and Trade Repo orting Syste em; or subsscriber of an n ATS) whe ether tradin ng is of a prop prietary natu ure or on behalf b of clie ents; and arketplace. a ma 1.1.2 Reequirementss Applicablee to Marketp place Particcipants T The ETR bu uilds on the obligatio ons outlined in Sectio on 11.1 of National IInstrumentt 31-103 R Registration n Requiremeents, Exemptions and Ongoing O Reg gistrant Oblligations8 (“ “NI 31-103” ”) under w which a registered firm f must establish, maintain m a nd apply p policies and procedu ures that e establish a system of controls c an nd supervisiion sufficient to proviide reasonaable assurance that tthe firm an nd each individual accting on itts behalf ccomplies w with securities legislattion and m manage the e risks assocciated with its businesss in accord dance with prudent bu usiness pracctices. T The ETR requires r th hat these risk manag gement an nd supervisory conttrols, policcies and p procedures must be re easonably designed d to o: ensu ure that all orders o are monitored m prep and po ost-trade; ematically liimit the fina ancial expo osure of thee marketplaace particip pant; syste ensu ure compliance with alll marketpla ace and reg gulatory req quirementss; ensu ure the ma arketplace participantt can stop p or canceel the entry of orde ers to a markketplace; ure the marrketplace participant p can c suspen nd or termiinate any m marketplace ensu e access granted to a clie ent; and ensu ure the entry y of orders does not in nterfere witth fair and o orderly markets. A participan nt dealer9 may m on a re easonable basis, b autho orize an inveestment de ealer to perrform on its behalf the t setting or adjustm ment of a specific risk managem ment or su upervisory control, 8 Published att http://www.oscc.gov.on.ca/doccuments/en/Secu urities-Category3 3/ni_20120228_3 31-103_unofficiaal-consolidated.p pdf 9 The term “p participant dealerr” is defined in ET TR as “a marketp place participantt that is an investtment dealer”. ns Respecting EElectronic Tradin IIROC Notice 12--0363 – Rules Notice N – Notice of o Approval – UMIR U – Provision ng 5 p policy or procedure under u certa ain circumstances wheere the invvestment de ealer’s relationship w with an ultimate clientt would pro ovide them m with betteer access to o informatio on, and would thus p provide for a more effective settin ng or adjussting of thee control, p policy or pro ocedure. G Granting ssuch an autthorization would req quire a writtten agreem ment betweeen the parrticipant dealer and tthe investm ment deale er, and a regular and a ongoin ng assessm ment of th he adequaacy and e effectivenesss of such an a agreeme ent. 1.1.3 Reequirementss Applicablee to Use of A Automated Order Systeems T The ETR esstablishes requiremen r nts surroun nding the use of auttomated o order system ms.10 A m marketplace e participant is requirred to take all reasonable steps to ensure that any use of an aautomated order syste em either by y itself or by b any clien nt does not interfere w with fair and d orderly m markets. Siimilarly, any client of a marketpla ace particip pant is itselff obligated to take reaasonable ssteps to enssure the sam me. A marketplace participant must also have a level of knowledg ge and und derstanding g of any aautomated order syste em used by y itself or a client that is sufficien nt to identiffy and man nage any rrisks associa ated with itts use. A marketplace m e participan nt must also o ensure that each auttomated o order system m is tested prior to usse, and at le east annuallly thereafteer, and hav ve controls in place tto immedia ately disablle and prev vent orderss generated d by an au utomated o order syste em from rreaching a marketplac m ce. 1.1.4 Reequirementss Applicablee to Marketp places place particcipants, the e ETR also reecognizes tthe role of the markettplace in In addition to marketp m managing the t risks asssociated with w electro onic trading g. The ETR places a requireme ent on a m marketplace e to preve ent the exxecution of o orders ffrom exceeding pricce and/or volume tthresholds set by the regulation n services provider p orr by a marrketplace iff it is a reccognized e exchange or o quotation and trad de reporting g system th hat directlyy monitors the condu uct of its m members or users and d enforces certain c requ uirements s et pursuan nt to the CSA Trading R Rules.11 T The ETR alsso sets outts specific conditions under wh hich a markketplace m may cancel, vary or ccorrect a tra ade executted on that marketplace. The marketplace must estab blish, mainttain and e ensure com mpliance with w reason nable policcies and p procedures that clearrly outline how a 10 0 The term “a automated order system” is defin ned in ETR as “a system used to aautomatically geenerate or electrronically transmitt orders that are made on n a pre-determined basis”. As se et out in section 1.2(1) 1 of Nationaal Instrument 23 3-103 CP, an automated order syystem would encompass “both hardware e and software used to generatte or electronicaally transmit ord ders on a pre-de etermined basis and would include sma art order routers and trading algorithms that are e used by marke tplace participaants, offered by marketplace parrticipants to clients or de eveloped or used d by clients.” 11 1 See section 8 of ETR. IIROC has sought pub blic comment on n the approach w which should be adopted to the establishment o of acceptable marketplace e thresholds. See IIROC Notice e 12-0162 – Ru ules Notice – Reequest for Com mment – UMIR – Request for Co omments on Marketplace Thresholds (May y 10, 2012). IIROC Notice 12--0363 – Rules Notice N – Notice of o Approval – UMIR U – Provision ns Respecting EElectronic Tradin ng 6 v variation, ca ancellation or correction can occcur, and m must make tthese policiies and pro ocedures p publicly ava ailable. A Additionally y, the ETR requires r a marketplac m e to provid de a markettplace participant with access tto its order and trade information on an im mmediate baasis and on n reasonable terms, to o ensure tthat markettplace partiicipants can n effectively y implemen nt the risk m manageme ent and sup pervisory ccontrols po olicies and procedures p required by b the rule. 1.2 Pre-existting Superrvision Obliigations fo or Electron nic Trading g under UM MIR C Currently, Rule 7.1 of o UMIR esttablishes trrading sup pervision ob bligations which Partticipants m must follow w, including g: adop pting writte en policies and a proced dures to bee followed b by directorss, officers, partners and employeess of the Parrticipant that are adeq quate, takin ng into acccount the b business and affairs a of th he Participant, to ensure complian nce with UMIR and eaach Policy; aand complying, prio or to the en ntry of an order on a m marketplacee, with: ory standards with rrespect to the review w, acceptan nce and applicable regulato approvall of orders, ocedures ad dopted, and d the policcies and pro e Policyy. all requirrements of UMIR and each P Policy 7.1 of UMIR elaborates further on o the ressponsibility of Particiipants for trading ssupervision and comp pliance, an nd certain elements e o of Policy 7.1 relate m more particu ularly to e electronic trading. t Specifically, S , the oblig gation to ssupervise aapplies whether the order is e entered on a marketplace: by a trader emp ployed by the Participa ant; n employee e of the Parrticipant thrrough an o rder routin ng system; by an r to a marketplaace throug gh the trad ding system m of the direcctly by a client and routed Particcipant; or by an ny other means. T The Particip pant mainttains respo onsibility fo or any ord er which iis entered on a marketplace w without the e involvement of a trrader emplo oyed by th he Participaant, as an e example w when the cclient main ntains a “ssystems intterconnect arrangem ment” in acccordance with marketplace rrequiremen nts. In such circumstances ad dequate su upervision policies an nd procedu ures are rrequired to address th he potential additional risk expossure with o orders not d directly han ndled by tthe Participant but tha at remain th he Participa ant’s respon nsibility. IIROC Notice 12--0363 – Rules Notice N – Notice of o Approval – UMIR U – Provision ns Respecting EElectronic Tradin ng 7 2 2. Discussion of the Amen ndments T The following is a sum mmary of the t principal compon nents of thee Amendm ments which h are set o out in Appe endix A of this notice: 2.1 Trading Supervisio on Obligati tions ment and Supervisory S C Controls, Po olicies and P Procedures 2.1.1 Rissk Managem R Rule 7.1 currently esta ablishes tra ading superrvision obliigations wh hich Particip pants mustt follow, including the establishment of written w policies and proceduress to ensure e complian nce with U UMIR. With h the ETR providing p a new fram mework dessigned to m mitigate the e risks of electronic ttrading, the e Amendme ents add se everal new subsection ns to align the superv visory requirements o of Rule 7.1 with the requirementss of the ETR R. T The Amend dments wo ould require e that a Pa articipant o or Access Person adop pt a system m of risk m management controlss designed to ensure e the manaagement o of risks spe ecifically associated w with electro onic trading g. Particula arly, they should s be d designed to o manage tthe risks associated w with accesss to one or more marrketplaces, and if appllicable, thee use of any y automate ed order ssystem, by a Participan nt, a client of the Participant or a n Access Peerson. P Part 7 of Po olicy 7.1 provides furrther inform mation regaarding the requirements set outt in Rule 7 7.1, and details the expectation e ns in regarrd to the eelements o of the risk management and ssupervisory y controls, policies an nd procedures which must be employed b by Participaants and A Access Persons. These e must inclu ude: automated con ntrols to examine each h order beffore entry on a markketplace to prevent the entry e of an order which would re esult in: the Partiicipant or Access Person exceeeding pre-d determined d credit orr capital threshold ds, articipant exceeding e pre-determ mined cred dit or othe er limits a client of the Pa assigned d by the Parrticipant to that client, or the Partticipant, Acccess Perso on or clieent of the Participan nt exceeding predetermin ned limits on o the valu ue or volum me of unexeecuted ord ders for a particular security or o class of securities; s 12 2 prov visions to prevent the t entry of an ord der that iis not in compliancce with 12 2 Requ uirements; “Requirements” include UM MIR, applicable securities regula ation, requiremeents of any selff-regulatory organization appliccable to the activity of the t account and d the rules and policies of any marketplace on n which the acccount activity taakes place. In particular, a IIROC Notice 12--0363 – Rules Notice N – Notice of o Approval – UMIR U – Provision ns Respecting EElectronic Tradin ng 8 prov visions of immediate i order and d trade in nformation to compliance stafff of the Particcipant or Access A Perso on; and regular post-tra ade monitoring for com mpliance w with Requireements. T The Amend dments require the Participant to o review an d confirm aat least ann nually, thatt the risk m management and supervisory co ontrols, poliicies and prrocedures aare adequate, maintained and cconsistently y applied, and that any deficciencies haave been documentted and re emedied p promptly. uthorization n to Set or Adjust Riskk Managem ment and Su upervisory C Controls, 2.1.2 Au Po olicies and Procedures P G Given that in certain circumsta ances, partticular conttrols may be better placed un nder the d direction off another dealer, prop posed new subsection n (7) of Rulee 7.1 would, on a reaasonable b basis, allow w the Particcipant to authorize a an investmeent dealer to perform m on its be ehalf the ssetting or adjustmen nt of a sp pecific risk managem ment or supervisory control, policy or 13 1 p procedure. Addition nally, the Amendmentts provide tthe same flexibility prrovided by the ETR w with respecct to the de evelopment or implem mentation of such controls, and d thus a Participant w would be permitted p to use the services s of a third parrty provider that is ind dependentt of each cclient of the Participant, other th han affiliate es of the P Participant. It is impo ortant to note that u under the ETR, whetther or not a third party p soluttion is utilized, only the Particcipant is p permitted to t directly and exclusively set and adjustt its supervvisory and risk manaagement ccontrols. T The new su ubsection (8 8) of Rule 7.1 7 outlines specific reequirements if either an authorizzation is m made to an n investmen nt dealer orr if a third party p provid der is utilizeed. Either ssituation re equires a w written agre eement tha at will precclude the in nvestment d dealer or th hird party from provid ding any o other perso on control over o any asspect of the e control, p policy or prrocedure. Further, un nless the investment dealer sub bject to the authorizattion agreem ment is also o a Participaant, subsecction (8) w will preclud de any auth horization with w respectt to an acco ount in which the inve estment de ealer or a rrelated entiity of the investment dealer holds a directt or indirecct interest ((other than n that of ccommission ns received d on transactions or a reasonaable fee fo or the adm ministration n of the aaccount). T The policy rationale fo or permittin ng a Participant to autthorize an investmentt dealer to perform o on its beha alf the settiing or adju usting of a superviso ry and riskk managem ment contro ol is the Participant or o Access Person that uses an auttomated order sy ystem must havee appropriate paarameters, policie es and procedurres to detect, prior to entrry, an order that is “clearly erroneous” or “unreasonable” and wh hich would interrfere with fair and orderly marketts if entered. See “Specific Provisions App plicable to Autom mated Order Systtems”. 13 3 Under the Amendments, A the e term “investment dealer” is interpreted as “an n investment deaaler for the purp poses of National Instrument 31-103 Regisstration Requirem ments, Exemptions and Ongoing Registrant Obligattions”. IIROC Notice 12--0363 – Rules Notice N – Notice of o Approval – UMIR U – Provision ns Respecting EElectronic Tradin ng 9 rrecognition n that situa ations existt where a participan nt dealer m may determ mine that another investment dealer has a relationsship with th he ultimatee client succh that the investmentt dealer, h having bettter access to t informattion relating g to the ul timate client, would be in a position to m more effecttively set orr adjust the control, po olicy or pro ocedure. Ass such, the Amendme ents only p provide forr an authorrization witth respect to t accountss where the investme ent dealer is in fact ttrading for an ultimate e client, an nd not in circumstancees where th here is no ultimate cliient and tthe trading is being made on a proprietary basis. b U Upon enterring into a written w agrreement pu ursuant to ssubsection (8), the Am mendmentss require d disclosure of o the name e and contact informa ation of thee investmen nt dealer or third partty to the M Market Regulator, as well w as any change in this inform mation. Thee provision of this info ormation w will allow the Markett Regulator to contact the inveestment deealer or third party tto make e enquiries about the application of the conttrols, polic ies or proccedures to orders or ttrades in ssituations when w additional inform mation is ne eeded. If the Particcipant has authorized a to an invesstment deaaler or has u e services o of a third utilized the p party provid der, the Participant is also required to revieew and con nfirm at leaast annually y by the aanniversary y date of the written agreement a with the in nvestment d dealer or th hird party, that the rrisk manage ement and supervisorry controls, policies an nd procedu ures are ade equate, maintained aand consisstently app plied, that any deficciencies haave been documentted and re emedied p promptly, and that the t investm ment dealerr or third party remaains in com mpliance w with the w written agre eement. 2.2 Specific Provisionss Applicablle to Autom mated Ord der Systemss In addition to the trading superrvision obliigations esttablished b by propose ed amendm ments to R Rule 7.1 de escribed ab bove, prop posed new Part 8 to Policy 7.1 sets out specific sup pervisory p provisions related to the use of automa ated orderr systems. As noted d earlier, the risk m management and su upervisory controls, policies p an nd procedu ures should d be desig gned to m manage the e risk associiated with access a to on ne or moree marketplaaces, and if applicable,, the use o of any automated orde er system, by b a Participant, Accesss Person, o or any clien nt. T The Amend dments req quire that each e Participant or Acccess Person have a le evel of kno owledge aand understanding of any autom mated orderr system useed by the P Participant, Access Perrson or a cclient of either. This le evel of know wledge sho ould be suffficient to aallow the Paarticipant o or Access P Person to id dentify and manage rissks associatted with thee use of thee automate ed order sysstem. T The Amend dments requ uire each Pa articipant or o Access Peerson to en nsure that aall automate ed order ssystems use ed by the Participant, P any client of the Partiicipant or aan Access P Person are ttested in aaccordance e with prud dent busine ess practices both initi ally before being used d for the first time, This testin aand at leastt annually thereafter. t ng must bee detailed in n a written record in order to cclearly dem monstrate th he testing undertaken n by the P articipant, Access Perrson and any third IIROC Notice 12--0363 – Rules Notice N – Notice of o Approval – UMIR U – Provision ns Respecting EElectronic Tradin ng 10 p party servicces utilized to employ y the autom mated ordeer system or the risk managem ment and ssupervisory y controls, policies p and d procedure es. In establishing the parameters fo or the mon nitoring of o order flow required u under both the ETR aand the Am mendments,, a Participa ant or Access Person should conssider the strrategy or sttrategies b being emplloyed by an ny automatted order systems s in u use, and th he potentiaal market im mpact of d defining such parameters inapprropriately. In determi ning the ap ppropriate scope of th he order aand trade parameters p , policies and a procedures the Paarticipant o or Access P Person shou uld, at a m minimum, ensure e they y are set to prevent an n order from m exceeding: the marketplacce thresholds14 appliccable to th he marketp place on w which the order is entered, or ed by IIROC C for the exeercise of th he power off a Market IIntegrity the limits publiccly disclose eaker or Officcial under Rule R 10.9 of o UMIR forr the triggeering of a ssingle-stockk circuit bre 15 regulatory interrvention forr the variatiion or canccellation of trade. G Generally, it is expected that th he risk management and superrvisory con ntrols, policcies and p procedures will be rea asonably de esigned to prevent th he entry of orders whiich would iinterfere w with the op peration of fair and orrderly markkets. The ssupervision n and comp pliance pro ocedures aadopted by y a Participa ant or Acce ess Person should if a pplicable, ccontain detailed guidance on h how the tessting of clie ent orders and a trades is to be conducted to o ensure that each auttomated o order system is tested d assuming g various market m cond ditions botth initially aand on at least an aannual basis going forrward. EEach Particiipant or Acccess Perso on must alsso have thee capabilityy to immed diately disaable any aautomated order syste em used by y themselve es or any client of the Participantt, and thus prevent aany orders generated by such sy ystem from m reaching a marketpllace. This would provide the P Participant or Access Person P the ability a to intervene in the event o of a malfunction or a ssituation w where a sy ystem was being used imprope erly. A Parrticipant orr Access Pe erson is ultimately rresponsible e for any orrder entered d or any trrade executted on a m marketplace,, and this d does not e exclude situ uations wh here an automated order o system m malfuncctions or iss improperrly used. S Such respo onsibilities include situ uations wh here a malffunction caauses a “ru unaway” algorithm e even if the malfunctio on is attribu uted to an aspect of tthe automaated order system thaat could n not be acce essed by the e Participan nt or Accesss Person forr purposes of testing. 14 4 For further information on “marketplace thre esholds” see IIRO OC Notice 12-01 62 - Rules Noticee – Request for C Comments – UM MIR – Request for Comments on Marketplacce Thresholds (Ma ay 10, 2012). 15 5 For further information see e IIROC Notice IIROC Notice 12-0040 – Ruless Notice – Guid dance Note – U UMIR – Guidancee Respecting Implementattion of Single-Sto ock Circuit Breakeers (February 2, 2012) 2 and IIROC C Notice 12-0258 8 – Rules Notice e – Guidance No ote – UMIR – Guidance on n Regulatory Interrvention for the Variation V or Canceellation of Tradess (August 20, 201 12). ns Respecting EElectronic Tradin IIROC Notice 12--0363 – Rules Notice N – Notice of o Approval – UMIR U – Provision ng 11 2.3 Variatio on, Cancelllation and Correction n of Tradess P Previously, Rule 7.11 prevented the cancellation or vvariation in price, volume or setttlement d date of an executed e trrade exceptt in specificc circumstaances. Partt 4 of the ET TR sets outt specific rrules detailing when a marketp place can cancel, c varry or correect a trade,, and as such the language of o Rule 7.11 has been amended to t reflect th his new framework. It now prov vides for tthe correction of a trad de in addition to the cancellation c n and variattion, and allso stipulate es that a m marketplace e can only take such actions: a arket Regu ulator if th he variation, cancellaation or with the priorr consent of the Ma ection is necessary to correct c an error e caused by: corre m or techno ological ma alfunction o of the markketplace itse elf, or a system vidual actin ng on behallf of the maarketplace; or an indiv with notice to the Markett Regulatorr immediateely followin ng the variiation, canccellation or co orrection: prior to the settlem ment of the trade by: th he marketp place at the e request of a partyy to the trrade and w with the co onsent of ea ach Particip pant or Acceess Person that is a paarty to the ttrade, or th he clearing agency thrrough whicch the trade is or wass to be cleaared and se ettled, and de, by each h Participan nt and Acce ess Person that is a after the settlementt of the trad party to the trade. 2.4 eper Obliga ations with h Respect tto Electron nic Trading g Gatekee U Under the Amendments, Rule 7.1 7 of UMIIR would aallow for a Participan nt to autho orize an investment dealer to o perform on its be ehalf the ssetting or adjusting of a speccific risk m management or supe ervisory con ntrol, policcy or proceedure, or fo or a Particiipant to uttilize the sservices of a third partty provider.. The Amen ndments ad dd Rule 10..17 of UMIR R which esttablishes ccertain gate ekeeper ob bligations, and will re equire thatt in either of the abo ove situatio ons, the P Participant must notify y the Marke et Regulator if either th he written aagreementt which setss out the tterms of su uch arrange ements hass been term minated, orr if the Partticipant hass reason to o believe tthat the inv vestment de ealer or third party ha as failed to remedy an ny deficienccy identified d by the P Participant in its regula ar review. 2.5 Editorial and Conssequentiall Amendme ents T The Amend dments makke several editorial e or consequen c ntial amendments inclu uding: IIROC Notice 12--0363 – Rules Notice N – Notice of o Approval – UMIR U – Provision ns Respecting EElectronic Tradin ng 12 adding a definittion of ETR to Rule 1.1; adding clause (c) ( to Rule 1.2 to note e that everyy term used d in UMIR w which is de efined or interrpreted in the ETR (particularly y, “automaated order system”, “marketplaace and regulatory requ uirements” and “participant deaaler”) has tthe meanin ng ascribed d to it in the ETR; E es in Part 1 of Policy 7..1 to reflectt the new rrule framew work in placce under deletting phrase the ETR; E and adding languag ge to Part 1 of Policy 7.1 to refllect guidan nce on the use of the e “short16 markking exemp pt” designation. 3 3. Sum mmary of the t Impac ct of the Amendmen nts T The follow wing is a summary of the mo ost significcant impaccts of the adoption of the A Amendmen nts. The Am mendmentss: ensu ure that Partticipants an nd Access Persons P ado opt, docum ment and maintain a sy ystem of risk management and supervisory s y controls, policies and proce edures reaasonably desig gned to manage m the risks asssociated w with electro onic tradin ng and acccess to markketplaces; ensu ure that Parrticipants and Access Persons aree effectively supervisiing trading g activity and are accoun nting for th he risks asssociated wiith electron nic access tto marketp places in theirr supervisorry and compliance mo onitoring prrocedures; and require an appropriate level of understandi ng, ongoing testing g and app propriate monitoring of any a automated orderr systems in n use by a Participantt, any clien nt of the erson. Particcipant or an Access Pe U Under the Amendmen A nts, Access Persons ha ave to speccifically intrroduce riskk managem ment and ssupervisory y controls, policies and a proced dures with respect tto their direct tradin ng on a m marketplace e as an Acccess Person (and not through a P Participant). This paraallels a requ uirement o on Access Persons P intrroduced in the ETR. However, H Acccess Perso ons presently only hav ve access tto one ma arketplace which op perates as a “negottiation” daark pool m marketplace e. The rrequiremen nt will have little pra actical imp pact on an Access Peerson unlesss they be ecome a ssubscriber to t a new marketplace that is tran nsparent. T There may be impactss to the ma arket in the form of m inimal additional laten ncy on som me order on the typ fflow. Any additional latency will also be dependent d pe of tradin ng strategie es in use aand the natture of the controls c an nd risk management fi lters alread dy in place. To the exttent that 16 6 For further information, see e IIROC Notice 12-0300 1 – Ruless Notice – Guidaance Note – UM MIR – Guidance on “Short Sale” and “ShortMarking Exempt” Order Desig gnations (Octobe er 11, 2012). IIROC Notice 12--0363 – Rules Notice N – Notice of o Approval – UMIR U – Provision ns Respecting EElectronic Tradin ng 13 aadditional latency may y result, it is not expeccted to havve a significcant impactt on the maajority of ttrading. Pe ersons emp ploying trad ding strateg gies that relly on ultra--low latency y connectio ons may h have to re-e evaluate ho ow they obttain access to a markettplace. 4 4. Tech hnological Implicattions and Implemen ntation Pllan T The Amend dments imp pose obliga ations on Participants P s and Accesss Persons to ensure that the rrisks associa ated with electronic trrading are appropriate a ely addresseed through h the establishment o of reasonab bly designe ed risk man nagement and a supervvisory contrrols, policie es and proccedures. T The Amend dments require pre-tra ade automa ated contro ols to preveent the enttry of orderrs which w would resu ult in either the Parrticipant or Access P Person, or any clien nt, exceeding pred determined d thresholdss which wo ould include credit or capital, as well as lim mits on the value or v volume of unexecuted u d orders forr a particula ar security o or class of ssecurities. It is expeccted a Parrticipant would w alrea ady establiish, maintaain and apply policcies and p procedures that establish a syste em of contrrols and supervision ssufficient to o manage the risks aassociated with w its bu usiness in accordance with prud ent busineess practice es as requirred both u under sectio on 11.1 of NI 31-103 and underr Rule 7.1 aand Policy 7 7.1. Additiionally, tho ose firms p providing clients c with h electronicc access to marketplacces would already be e subject to o similar rrequiremen nts under th he access rules r of the e various m marketplacees to which h the Particcipant or A Access Persson directs orders. Te echnology work and associated costs will likely be re equired, b but the exttent of these costs will w vary dependent o n the level of sophisstication of current p practices, and the natu ure of the business b acttivities of th he Participaant or Accesss Person. O On the publication of o the Prop posed Ame endments, IIROC exp pected thatt the amen ndments w would beco ome effective on the date IIROC C publishes notice of aapproval o of the amen ndments aand that the e implemen ntation date would be e the later o of: Marcch 1, 2013, the date th he ETR beco omes effecttive; and 120 days follow wing the pu ublication of notice of approval o of the amen ndments. A As most of the Amend dments are e designed to align th he requirem ments of UM MIR to thosse of the EETR, IIROC concluded d that, to avoid a confu usion in thee industry, the Amen ndments sh hould be e effective wiith the intrroduction of o ETR on March M 1, 2 2013. IIRO OC and the e CSA cond ducted a ssurvey of members of the Investmentt Industry Associatio on of Can nada (“IIA AC”) on implementa ation of ET TR and the e Amendments. Thaat survey in ndicated th hat there w were no u unique requirements of the Ame endments (as compaared with th he requirem ments that aligned U UMIR to the e ETR) that could not be implem mented on M March 1, 2 2013. How wever, the re esults of tthe IIAC survey indica ated that a limited number of Paarticipants had concerns regardiing their aability to co omplete sysstems testin ng by March 1, 2013. IIROC Notice 12--0363 – Rules Notice N – Notice of o Approval – UMIR U – Provision ns Respecting EElectronic Tradin ng 14 IIIROC reco ognizes tha at Particip pants and d Access Pe ersons ma ay have siignificant systems w work with respect to o the intro oduction, pursuant p tto Part 7 o of Policy 7 7.1, of auto tomated ccontrols to o examine each e orderr before en ntry on a m marketplacce to preve ent the enttry of an o order whicch would re esult in: the Participan nt or Acce ess Person n exceedin ng pre-dettermined credit or capital thressholds; a cllient of th he Particip pant exce eeding pre e-determin ned creditt or otherr limits assig gned by the Participa ant or to th hat client; or the Participan nt, Accesss Person or client of the P Participantt exceedin ng predete ermined lim mits on the value orr volume o of unexecu uted orders rs for a pa articular security or classs of securiities. W While IIRO OC expects that Particcipants an nd Access P Persons willl use bestt efforts to comply w with the requiremen r nts for au utomated controls o on March 1, 2013, IIROC willl allow 2013 to ccomplete testing an P Participants and Acccess Perso ons until May 31, 2 nd fully iimplementt such auto omated co ontrols. Alll other requirementts of the A Amendmen nts must b be implem mented by Participant P ts and Acce ess Personss by March h 1, 2013. T The CSA has h followe ed a comp parable app proach in respect off the imple ementation n of the rrequiremen nts for auto omated con ntrols unde er ETR. Refference sho ould be made to Multilateral C CSA Staff Notice N 23-3 313 issued by the CS SA regardin ng the imp plementatio on date forr certain 17 aaspects of ETR. E 17 7 Published att http://www.oscc.gov.on.ca IIROC Notice 12--0363 – Rules Notice N – Notice of o Approval – UMIR U – Provision ns Respecting EElectronic Tradin ng 15 A Appendiix A - Tex xt of Prov visions Respectin R ng Electrronic Tra ading T The Universsal Market Integrity Ru ules are hereby amend ded as follows: 1 1. Rule 1.1 is amen nded by ad dding the fo ollowing deefinition of “Electronicc Trading Ru ules”: “Electro onic Trad ding Ruless” means National IInstrumentt 23-103 EElectronic Trading as a amended d, supplem mented and in effect fro om time to time. 2 2. Rule 1.2 is amen nded by: (a) deleting the word “and” “ at the e end of claause (b); (b) renumbe d), and ering clause e (c) of subssection (1) as clause (d (c) inserting the following as clausse (c) of su bsection (1): (c) 3 3. de efined or in nterpreted in the Elecctronic Traading Ruless has the m meaning asscribed to itt in that National Instrrument. Rule 7.1 is amen nded by ad dding the fo ollowing su ubsections: (6) (7) (8) No otwithstand ding any other o provvision of th his Rule, a Participan nt or an Acccess Perso on shall ad dopt, docu ument and d maintain a system m of risk managemen m t and su upervisory controls, policies and pro ocedures re easonably designed, d in accordan nce with prudent bussiness pracctices, to en nsure the manageme ent of thee financial, regulatorry and oth her risks asssociated with: w (a)) access to one or more m markeetplaces; an nd (b b) if applicable, the e use by thee Participan nt, any clien nt of the Participant or the e Access Perrson of an aautomated order syste em. A Participant P may, on a reasonablee basis: (a a) authorize an inve estment deealer to perrform on itss behalf the e setting upervisory control, or adjjusting of a specific riisk manageement or su policy y or procedure; or (b b) use th he services of o a third p party that provides riskk managem ment and superv visory conttrols, policiees and proccedures. An n authorizzation ove er the settting or aadjusting o of a speccific risk managemen m t or superv visory contrrol, policy or procedu ure or retain ning the IIROC Notice 12--0363 – Rules Notice N – Notice of o Approval – UMIR U – Provision ns Respecting EElectronic Tradin ng 16 se ervices of a third pa arty under subsection n (7) must be in a written ag greement with w the inv vestment deealer or thirrd party thaat; (9) (a a) preclu udes the inv vestment d dealer or th hird party from provid ding any other person control c ovver any aaspect of the speccific risk manag gement or supervisoryy control, p policy or prrocedure; (b b) unlesss the auth horization is to an iinvestmentt dealer th hat is a Particiipant, preccludes the authorizatiion to the investmen nt dealer over the t setting g or adjustting of a sspecific risk managem ment or superv visory conttrol, policy or procedure respecting an acccount in which h the investtment dealer or a relaated entity of the inv vestment dealerr holds a direct d or ind direct interrest other tthan an intterest in the co ommission charged on n a transacction or reasonable fee e for the admin nistration off the accou unt; and (cc) preclu udes the use u of a third partyy unless tthe third party is independent of each e client of the Partticipant oth her than affiliates of the Pa articipant. A Participant P shall forthw with notify the Markett Regulatorr: (a a) (b b) (10) upon entering in nto a writteen agreemeent with an n investmen nt dealer or thirrd party desscribed in ssubsection (8), of: (i) the name of o the invesstment dealer or third party, and (ii) the conta act informaation for th he investm ment dealerr or the third party ty which w will permit tthe Markett Regulatorr to deal with the investmen nt dealer or third p party imm mediately ution of a ttrade for following the entry of an ordeer or execu e Market R Regulator w wants addittional inforrmation; which the and of any change in the inform ation descrribed in clause (a). Th he Participant shall rev view and co onfirm: (a a) at least annually that: t (i) the risk managemen m nt and supeervisory con ntrols, policies and procedure es under su ubsection (6 6) are adequate, (ii) the Particiipant has m maintained and consisstently app plied the risk mana agement aand supervvisory conttrols, policcies and procedure es since thee establishm ment of the e controls, policies and proce edures or th he date of tthe last ann nual review,, and IIROC Notice 12--0363 – Rules Notice N – Notice of o Approval – UMIR U – Provision ns Respecting EElectronic Tradin ng 17 (iii) (b b) 4 4. any deficciency in tthe adequaacy of a control, policy or procedure e has been documenteed and promptly reme edied; if the Participantt has autho orized an investment dealer to perform of a specificc risk manaagement on its behalf the setting or adjusting o or sup pervisory co ontrol, poliicy or proceedure or re etained the services of a third t party,, at least a nnually byy the anniv versary date e of the writte en agreement with thee investmen nt dealer orr third party y that: (i) the risk managemen m nt and supeervisory con ntrols, policies and procedure es adopted by the invvestment de ealer or third party under sub bsection (6)) are adequ uate, (ii) the investtment dea ler or third d party haas maintain ned and consistenttly applied the risk m managemen nt and sup pervisory controls, policies p and d procedurres since th he establish hment of the contro ols, policiess and proceedures or tthe date off the last annual rev view, and (iii) any deficciency in tthe adequaacy of a control, policy or procedure e has been n documen nted by th he Participaant and promptly remedied by the inveestment de ealer or thirrd party, and (iv) n complian nce with the investtment dealer or third party is in the written agreeme nt with thee Participant. Rule 7.11 is ame ended by: (a) inserting in the title the words “ and Corrrection” aftter the word d “Cancellaation”; (b) inserting g in clause (b) ( the phra ase “or cor rected” imm mediately ffollowing th he word “varied”;; (c) deleting clause (d) and a insertin ng the follo owing clausses: (d) with the prior conse ent of thee Market Regulator, if the variation, ca ancellation or correction would be necessaary to corre ect an errorr caused by y a system or technological malffunction off the marke etplaces sysstems or eq quipment or caused d by an individual acting o on behalf of the marketplace; m ; or (e) with notice to t the Market Regulattor immediiately follow wing the variation, ca ancellation or correction of the ttrade in su uch form an nd mannerr as may IIROC Notice 12--0363 – Rules Notice N – Notice of o Approval – UMIR U – Provision ns Respecting EElectronic Tradin ng 18 be e required by b the Marrket Regulattor and succh notice sh hall be give en, if the va ariation, can ncellation or o correctio on is made: (i)) (ii) 5 5. prior to t the settle ement of th he trade, byy: (A) the marke etplace on which thee trade waas executed d at the request off a party to o the trade and with th he consentt of each Participant and Accesss Person th hat is a parrty to the traade, or (B) the clearin ng agency through w which the traade is or w was to be cleared an nd settled, aand after the t settlem ment of thee trade, by each Partiicipant and d Access Person n that is a party p to thee trade. Part 10 is amended by add ding the following as R Rule 10.17:: Gatekee eper Oblig gations wiith Respecct to Electtronic Tra ading (1) A Participantt that has, under u Rule 7.1, autho orized an investment d dealer to pe erform on its behalf the settting or aadjusting o of a speccific risk t or superv managemen m visory contrrol, policy o or procedu ure or the p provision off risk manag gement or supervisorry controls,, policies an nd procedu ures to a th hird party sh hall forthwiith report to o the Market Regulato or the fact tthat: (a a) the written w agre eement witth the inveestment de ealer or third party has be een termina ated; or (b b) the Pa articipant knows or haas reason to believe that the inv vestment dealerr or third party p has fa iled to pro omptly remedy any de eficiency identiffied by the Participantt. T The Policiess to the Universal Markket Integrity y Rules are hereby am mended as follows: 1 1. Part 1 of Policy 7.1 is amen nded by: (a) g at the start of the seventh paraagraph the w ere” with th he word word “Whe replacing “When”;; (b) deleting in the seventh parag graph the p phrase “(fo or example by a client with a ect arrangement in accordancce with Po olicy 2-501 of the systems interconne Toronto Stock Exchange)”; (c) a the end of the third d bullet of the eight paragraph the phrase e “other adding at than a client require ed to use th he “short-m marking exeempt” desig gnation” ; aand IIROC Notice 12--0363 – Rules Notice N – Notice of o Approval – UMIR U – Provision ns Respecting EElectronic Tradin ng 19 (d) 2 2. 3 3. 4 4. deleting at the end of the fo ourth bulleet of the eeighth paraagraph the e phrase “(unless the tradin ng system of the Paarticipant restricts trrading activ vities in affected securities”.. Part 2 of Policy 7.1 is amen nded by: (a) deleting the phrase es “Participants are reminded thaat”, “the entry of”, an nd “(For example, for Partiicipants th hat are Paarticipating Organizattions of the TSE, reference e should be b made to o the Policyy on “Connection of Eligible Clients of Participating Organ nizations)”; and (b) entered” im mmediately before the phrase “m must comply y”. adding the word “e Part 3 of Policcy 7.1 is amended a in n respect of the tab ble of Miniimum Com mpliance Proce edures for Trading T Supervision UMIR U and Po olicies by: (a) adding reference to “Electro onic Accesss to Marrketplaces”,, “Rule 7..1” and “Securities Legislation” and asssociated co ompliance review proccedures; (b) ng the term “restricted d list” to “reestricted security”; amendin (c) amendin ng the term “firm restrricted list” tto “firm trad ding restricction”; and (d) deleting references to Rule 7.8 and Rulee 7.9 and ssubstituting g reference e to Rule 7.7 in reg gard to “restricted issu ues”. Policy 7.1 is furtther amend ded by adding the foll owing Partts: Part 7 – Specific Provisions Applicab ble to Elec ctronic Ac ccess Trading supervision related to electro onic accesss to markketplaces m must be ed by a Parrticipant orr Access Peerson in acccordance w with a docu umented performe system of o risk man nagement and a supervvisory controls, policie es and pro ocedures reasonab bly designe ed to ensure e the manaagement off the financcial, regulattory and other riskks associate ed with elecctronic acceess to markketplaces. The riskk managem ment and superviso ry controlls, policiess and pro ocedures employe ed by a Partticipant or Access A Pers ons must in nclude: au utomated controls c to examine eaach order b before entry y on a marketplace to o prevent th he entry of an a order w which would d result in: the Pa articipant or o Access P Person exceeeding pre-determine ed credit or cap pital thresho olds, IIROC Notice 12--0363 – Rules Notice N – Notice of o Approval – UMIR U – Provision ns Respecting EElectronic Tradin ng 20 a clien nt of the Pa articipant exxceeding p pre-determined credit or other limits assigned by b the Particcipant or to o that clientt, or the Pa articipant, Access A Pers on or client of the Parrticipant exxceeding pre-de etermined limits l on th he value or volume of unexecuted orders for a particular p se ecurity or cclass of secu urities; provision p to o prevent the entry off an order tthis is not in complian nce with Requiremen R nts; provision p of immediatte order an nd trade infformation tto complian nce staff of o the Particcipant or Acccess Person; and regular r post-trade monitoring forr compliancce with Req quirementss. A Participant or Acccess Person n is respon nsible and accountable for all fu unctions that they y outsource e to a serv vice provid er as set o out in Part 11 of Com mpanion Policy 31-103CP Reg gistration Requirement R ts and Exem mptions. Supervisory and compliance monitoring m procedurees must be designed tto detect vent accoun nt activity that t is or may be a vio olation of Re equirementts which and prev n, requirem includes applicable e securitiess legislation ments of aany self-reg gulatory organiza ation appliccable to the e account aactivity and d the rules aand policie es of any marketplace on wh hich the acccount activvity takes place. These e procedurres must include “post-orde er entry” compliance c e testing eenumerated d under Paart 1 of at are not in n complian nce with specific rules,, and by Policy 7.1 to detectt orders tha addressin ng steps to o monitor trading t actiivity, as pro ovided und der Part 5 o of Policy 7.1, of any a person who has multiple acccounts, w with the Parrticipant an nd other accountss in which the perso on has an interest orr over whicch the perrson has direction n or control. ble to Auttomated O Order Systtems Part 8 – Specific Provisions Applicab Trading supervision n by a Parrticipant orr Access Peerson mustt be in accordance with a documente d ed system of risk m managemen nt and sup pervisory ccontrols, policies and a proced dures reaso onably desig gned to en nsure the m managemen nt of the financial,, regulatorry and othe er risks asssociated wiith the use e of an auttomated order sy ystem by the Particiipant, the Access Peerson or any client of the Participant. Each Participant or o Access Person m ust have a level of knowled dge and anding of any autom mated ordeer system u used by th he Participaant, the understa Access Person P or any a client of the Parrticipant th hat is sufficcient to allow the IIROC Notice 12--0363 – Rules Notice N – Notice of o Approval – UMIR U – Provision ns Respecting EElectronic Tradin ng 21 Participant or Accesss Person to o identify a nd managee the risks aassociated w with the use of the automate ed order system. The Partiicipant or Access A Perso on must en nsure that eevery autom mated order system used by the Participant, the Access Perrson or an ny client off the Particcipant is tested in n accordancce with pru udent busin ness practicces initially y before use e and at least ann nually there eafter. A written w reco ord must b be maintain ned with ssufficient details to o demonstrrate the testting of the automated d order systtem underttaken by the Partiicipant, Access Person and anyy third parrty employed to prov vide the automated order sy ystem or risk r manag ement or ssupervisory y controls, policies and proccedures. The scop pe of appro opriate ord der and trad de parameeters, policies and pro ocedures should be b tailored to the strategy or strrategies beiing pursued by an au utomatic order sysstem with due d consid deration to the potenttial market impact of defining such parrameters to oo broadly and in anyy event mu ust be set so as not to o exceed the markketplace thresholds ap pplicable to o the markeetplace on which the order is entered or would otherwise o exceed e the limits pub blicly disclo osed by the e Market Regulato or for the exxercise of the t power o of a Market Integrity Official und der Rule 10.9 of UMIR. U The Marrket Regula ator expects the risk m managemeent and supervisory ccontrols, policies and procedures to comply c witth the Elecctronic Trad ding Rules and be reasonab bly designe ed to prevent the entryy of any orrder that w would interfere with fair and orderly ma arkets. Thiss includes adoption o of complian nce proced dures for trading by b clients, if i applicable, containi ng detailed d guidance on how te esting of client ord ders and trrades is to be conduc ted to ensu ure that prior to engaagement and at le east annua ally thereaftter, each aautomated order systtem is satissfactorily tested asssuming various markket conditio ons. In add dition to reg gular testin ng of the automated order sy ystems, pre eventing interference with fair an nd orderly markets requires development of pre e-programm med internal parametters to pre event or “flag” with alerts on n a real-tim me basis, thee entry of o orders and e execution o of trades by an au utomated order system m that exceeed certain volume, orrder, price or other limits. Each Parrticipant or Access Perrson must h have the ab bility to immediately override or disab ble automa atically any y automateed order ssystem and d thereby prevent orders generated by b the auto omated ord der system from bein ng entered on any marketplace. Notwithsstanding an ny outsourccing or aut horization over of riskk managem ment and supervisiion controls, a Particip pant or Acccess Person n is responsible for an ny order entered or any trad de executed on a maarketplace, including aany order or trade IIROC Notice 12--0363 – Rules Notice N – Notice of o Approval – UMIR U – Provision ns Respecting EElectronic Tradin ng 22 resulting g from the improper operation o or malfuncction of the e automate ed order system. This respo onsibility in ncludes insttances in w which the m malfunction which gave rise e to a “runa away” algorithm is atttributed to an aspect o of the algorithm or automated order sy ystem that was not ““accessible”” to the Paarticipant or Access Person fo or testing. IIROC Notice 12--0363 – Rules Notice N – Notice of o Approval – UMIR U – Provision ns Respecting EElectronic Tradin ng 23 Appendix B - Co omments Received in Response to t Rules No otice 12-02 200 - Request for Com mments UM MIR - Provissions Respe ecting Electrronic Tradin ng On June 28, 2012, IIR ROC issued IIR ROC Notice 12--0200 requestting commentss on proposed d amendmentss to UMIR resp pecting electronic trading g (“Proposed Amendments”) A ). IIROC receiv ved commentss on the Propo osed Amendmeents from: CIBC World Markets Inc. (“CIBC”) Investm ment Industry Association A of Canada (“IIAC C”) RBC Capittal Markets (“R RBC”) Scotia Capital Inc. (“Sco otia”) TD Secu urities Inc. (“TD D”) A copy y of the comm ment letters re eceived in response to the Proposed Am mendments is publicly available on the w website of IIRO OC (www.iiroc.ca underr the heading “Notices” and d sub-heading g “Marketplace e Rules – Req quest for Comments”). The e following table ose presentts a summary y of the comm ments receive ed on the Pro oposed Amend dments togetther with the responses off IIROC to tho comme ents. Column 1 of the table highlights the revisions to th he Proposed Amendments A o on the approvaal of the Amendments. Text o of the Provision ns Approval of the Amendme ents (Revisiions to the Proposed Amendm ments Highligh hted) 1.1 Comm mentator and Summary S of Commen nt IIROC Ressponse to Commentator and Addittional IIROC Commentary D Definitions “Electro onic Trading Rules” means National Instrument 23-103 Elecctronic Trading as amended, supplem mented and in effect frrom time to time. 1.2 In nterpretation (1) Unle ess otherwise defined d or interpreted, every term used in UMIR that is: (a) defined in subsecction 1.1(3) of National N Instrumentt 14101Definitions has th he meaning ascribed to it in that subsectio on; ed in the Marketplace e Operation Instrume ent has (b) defined or interprete the meaning ascribe ed to it in that Nationa al Instrument; (c) defined or interpre eted in the Electron nic Trading Rules ha as the meaning ascribed to o it in that National Instrument; and (d) a reference to a requirement of an Exchange or a QTRS shall have the meaning ascribe ed to it in the applicab ble Marketplace Rule. IIROC Notiice 12-0130 – Ruless Notice – Notice of Approval A – UMIR – Provisions P Respectin ng Electronic Trading g 24 Text o of the Provision ns Approval of the Amendme ents (Revisiions to the Proposed Amendm ments Highligh hted) 7.1 Trad ding Supervision Obligations … (6) Notw withstanding any otther provision of thiss Rule, a Participant or an Acce ess Person shall ado opt, document and maintain a system of o risk man nagement and sup pervisory controls, policies and proce edures reassonably designed, in accordance with prudent business practicces, to ensu ure the managemen nt of the financial, regulatory r and other risks asso ociated with: Comm mentator and Summary S of Commen nt IIROC Ressponse to Commentator and Addittional IIROC Commentary Scotia – Seeks clarification on whether a proceduree ts where a thiird party vendor setss or adjusts risk limits at the spe ecific written requesst of the Participan t would be co onsidered acceptable e. The Amendments require that the Participant establish h a system of risk management and supervisory contro ols, policies and prrocedures. The Am mendments permit the t Participant to au uthorize an investmen nt dealer to perform on its behalf the setting or adjustin ng of a specific risk r management or supervisory control, policy or procedure.. If the Participant u uses a third party to provide the superviso ory controls, policie es and procedures, the Participant or an authorized investment dealer must b be the only persons that may set or adjust the controls even n though the setting or adjustment will be effected by the e third party provid der. IIROC has revise ed the Guidance on n Electronic Trading to clarify this point. (a) access to one or more marketplaces; and e by the Participant, any client of Particip pant or (b) if applicable, the use the Access Person off an automated order system. (7) A Paarticipant may, on a re easonable basis: (a) authorize an investm ment dealer to perforrm on its behalf the setting s or adjusting of a sp pecific risk manageme ent or supervisory co ontrol, policy or procedure;; or vides risk managemen nt and (b) use the services of a third party that prov supervisory controls, policies and procedures. (8) An authorization over the setting or adjusting of a specific risk man nagement or supervisory control, policy or procedure or rettaining the sservices of a third pa arty under subsection n (7) must be in a written w agre eement with the invesstment dealer or third d party that; (a) precludes the investtment dealer or third d party from providin ng any other person control over any asp pect of the specificc risk management or sup pervisory control, policy or procedure; vestment dealer thatt is a (b) unless the authorizzation is to an inv Participant, preclud des the authorization n to the investment dealer over the setting orr adjusting of a spe ecific risk manageme ent or supervisory control,, policy or procedure e respecting an account in which the investme ent dealer or a relate ed entity of the invesstment dealer holds a directt or indirect interest other o than an interest in the commission charge ed on a transaction or reasonable fee fo or the administration of the account; and arty is (c) precludes the use of a third party unless the third pa independent of each client of the Particip pant other than affilia ates of the Participant. IIROC Notiice 12-0363 – Ruless Notice – Notice of Approval A – UMIR – Provisions P Respectin ng Electronic Trading g 25 Text o of the Provision ns Approval of the Amendme ents (Revisiions to the Proposed Amendm ments Highligh hted) Comm mentator and Summary S of Commen nt IIROC Ressponse to Commentator and Addittional IIROC Commentary (9) A Paarticipant shall forthw with notify the Market Regulator: (a) upon entering into a written agreement with an investment dealer bed in subsection (8), of: or third party describ (i) the name of the e investment dealer or o third party, and (ii) the contact info ormation for the inve estment dealer or the e third party which wiill permit the Market Regulator to deal wiith the investment dea aler or third party immediately followin ng the entry of an ord der or execution of a trade for which the Market M Regulator wantts additional informattion; and (b) of any change in the e information describe ed in clause (a). (10) The Participant shall revie ew and confirm: (a) at least annually tha at: (i) the risk manag gement and supervissory controls, policie es and procedures und der subsection (6) are e adequate, (ii) the Participantt has maintained and d consistently applie ed the risk managem ment and supervisorry controls, policiess and procedures sin nce the establishmen nt of the controls, policies and proceduress or the date of the last annual review, and d (iii) any deficiency y in the adequacy of a control, poliicy or procedure has been documented an nd promptly remedied d; (b) if the Participant hass authorized an investtment dealer to perfo orm on its behalf the setting g or adjusting of a sp pecific risk management or supervisory control, policy or procedure to an investment dea aler or es of a third party, at least annually by b the retained the service anniversary date off the written agreem ment with the invesstment dealer or third party that: (i) the risk manag gement and supervissory controls, policie es and procedures adopted by the investm ment dealer or third party on (6) are adequate, under subsectio (ii) the investment dealer or third party p has maintained d and consistently ap pplied the risk management and superrvisory controls, policiies and procedures since s the establishment of the controls, policies p and procedures or the date of th he last annual review, and (iii) any deficiency y in the adequacy of a control, poliicy or procedure hass been documented d by the Participant and IIROC Notiice 12-0363 – Ruless Notice – Notice of Approval A – UMIR – Provisions P Respectin ng Electronic Trading g 26 Text o of the Provision ns Approval of the Amendme ents (Revisiions to the Proposed Amendm ments Highligh hted) Comm mentator and Summary S of Commen nt IIROC Ressponse to Commentator and Addittional IIROC Commentary IIAC – No ot clear why consent from the Markeet Regulator is i required to vary, cancel or correct a trade when n the error is caussed by a system o or technologiccal malfunction of the marketplacee systems orr an individual actin ng on behalf of thee marketplace e. Would support a notice n requirement. UMIR imposes a number of obligatio ons which are measurred places (e.g. provissions related to the t across marketp prevention of trrade-throughs underr the Order Protection Rule). While a m marketplace may loo ok at activity on its ow wn marketplace wh hen making a decisiion to vary, cancel or correct, IIROC ass the Market Regulato or must ensure that the t overall result is consistent with a “faair and orderly market” (such as ensuring that trades that may have been triggerred or followed on from the “erroneous” trade on the one o ve been dealt with att the same time and in marketplace hav the same fashion n. In the view of IIROC, a notice requireme ent would lead to un ncertainty and confussion with respect to the t her disposition of “ “affected” trades th hat occurred on oth marketplaces. promptly reme edied by the investm ment dealer or third party, and (iv) the investmentt dealer or third party y is in compliance wiith the written agreem ment with the Participant. 7.11 V Variation, Cancellattion and Correctio on of Trades No trade executed on a marke etplace shall, subsequ uent to the execution of the trade, be: (a) canccelled; or (b) varie ed or corrected with respect r to: (i) the price of the trade, (ii) the volume of the trrade, or (iii) the date for settleme ent of the trade, except: (c) by the Market Regulator in accordance with UMIR; U (d) with h the prior consentt of the Market Re egulator, if the variation, canccellation or correction n would be necessary y to correct an error caused c by a system or technological malfunction of the marketplace’s sy ystems or e equipment or cause ed by an individual acting on behalf of o the marrketplace; or (e) with h notice to the Markett Regulator immediattely following the variation, canccellation or correction n of the trade in such h form and manner as a may be rrequired by the Mark ket Regulator and succh notice shall be giv ven, if the v variation, cancellation n or correction is mad de: (i) prior to the settleme ent of the trade, by: (A) the marketplace on which the trrade was executed at a the request of a party to the trade and d with the consent of each Participant and d Access Person that iss a party to the trade,, or (B) the clearing ag gency through which h the trade is or was to be cleared and setttled, and ach Participant and Access A (ii) after the settlementt of the trade, by ea Person that is a party y to the trade. 10.17 Gatekeeper Oblig gations with Respect to Electronic Tra ading (1) A Paarticipant that has, un nder Rule 7.1, authorized an investment dealer to p perform on its beha alf the setting or ad djusting of a specific risk IIROC Notiice 12-0363 – Ruless Notice – Notice of Approval A – UMIR – Provisions P Respectin ng Electronic Trading g 27 Text o of the Provision ns Approval of the Amendme ents (Revisiions to the Proposed Amendm ments Highligh hted) Comm mentator and Summary S of Commen nt IIROC Ressponse to Commentator and Addittional IIROC Commentary man nagement or superv visory control, poliicy or procedure to t an investment dealer or the e provision of risk management or superrvisory ocedures to a third party p shall forthwith report conttrols, policies and pro to th he Market Regulator the t fact that: (a) the written agreeme ent with the investme ent dealer or third parrty has been terminated; orr ws or has reason to believe b that the invesstment (b) the Participant know dealer or third party y has failed to promp ptly remedy any deficiency identified by the Partticipant. Policy 7.1 – Trading Super rvision Obligationss r Supervision and Compliance C Part 1 – Responsibility for … In perform ming the trading sup pervision obligations, the Participant will act as a “gatekeeper” to help pre event and detect violations of appllicable ments. Requirem When an n order is entered on n a marketplace with hout the involvemen nt of a trader, th he Participant retains responsibility for thatt order and the superrvision policies and procedures sho ould adequately ad ddress the additiona al risk e which the Participa ant may have for orrders that are not directly d exposure handled by staff of the Participant. For example, it may be appropria ate for or compliance testing g a higher percenta age of the Particcipant to sample fo orders th hat have been enterred directly by clientts than the percenta age of orders sampled in other circum mstances. In additio on, the “post-order entry” compliance tessting should recognizze that the limite ed involvement of sta aff of the Participant in the entry of orderrs by a direct acccess client may restrict the ability of the Participant P to detect orders that are not in compliance with w specific rules. For example, “postt-order ompliance testing ma ay be focused on whe ether an order entered by a entry” co direct acccess client: • has ccreated an artificial prrice contrary to Rule 2.2; 2 • is paart of a “wash trade” (in circumstances when the client has more than n one account with the Participant); • is an n unmarked short sale (if the trading systtem of the Participant does not aautomatically code as “short” any sale of a security not then held h in the aaccount of the client other than a client required r to use the “short“ markking exempt” designa ation); and IIROC Notiice 12-0363 – Ruless Notice – Notice of Approval A – UMIR – Provisions P Respectin ng Electronic Trading g 28 Text o of the Provision ns Approval of the Amendme ents (Revisiions to the Proposed Amendm ments Highligh hted) Comm mentator and Summary S of Commen nt IIROC Ressponse to Commentator and Addittional IIROC Commentary • has complied with otherr order marking requ uirements and in parrticular gnated the requirement to marrk an order as from an insider or desig eholder. share Policy 7.1 – Trading Super rvision Obligationss nt of a Supervision System Part 2 – Minimum Elemen … The Markket Regulator recogniizes that there is no one o supervision system m that will be ap ppropriate for all Partticipants. Given the differences among firms in terms of their size, the nature of their business, wh hether they are engag ged in e and business in more than one location or jurisdicction, the experience nd the fact that efffective jurisdiction can be training of its employees an achieved in a variety of wayss, this Policy does not mandate any particular method of supervision of trading activity. Furthermore, comp pliance type or m with this Policy does not relieve Participants from m complying with specific ments that may apply in certain circumstances. In particular, in Requirem accordan nce with subsection (2 2) of Rule 10.1, orderrs entered (including orders entered b by a client, an investm ment dealer under a routing arrangementt or by a client through an order execution services)) must comply witth the t order is entered and the Marketplace e Rules Marketplace Rules on which the h the order is executed d. on which … Policy 7.1 – Trading Super rvision Obligationss ance Procedures fo or Trading on a Part 3 - Minimum Complia M Marketplace Minimum m Complian nce Procedurres Compliance Re eview Procedures Potential Infformation Sources Frequency and Sam mple Size Restricted Security • review for any trading t of restricted issuess done by proprietary or employee e accounts • order tickets • daily Rule 2.2 Rule 7.7 • the diary list • trading blottters • firm trading restriction • monthly stattements Electronic Access places to Marketp Rules 7.1 Securities Legislation n pre-trade orde er review: prevent entry of orders o on an order-by orde er basis that exceed pre-d defined price and size parameters; prevent entry of orders o that automated controls pre-trade real-time allert systems immediate order and trade information n including execution reports. r •daily IIROC Notiice 12-0363 – Ruless Notice – Notice of Approval A – UMIR – Provisions P Respectin ng Electronic Trading g 29 Text o of the Provision ns Approval of the Amendme ents (Revisiions to the Proposed Amendm ments Highligh hted) Comm mentator and Summary S of Commen nt IIROC Ressponse to Commentator and Addittional IIROC Commentary Scotia – Concerned C that while e smart order routers rs are defined d as an automated order system theree generally iss not any capacity to change an ordeer using the sm mart order router systtem directly. nts will require au utomated controls to The Amendmen evaluate orders “ “before entry on a m marketplace”. The effect of the Amendm ments is to require o orders to have “passsed through” filters tthat are under the co ontrol of the Participa ant or Access Person n entering the order.. If orders do not pass through automaated controls that h have been set by the t Participant priorr to entry to a sm mart order router, the t automated conttrols would have to be at the level of the t mart uter. IIROC recognizes that current sm smart order rou order routers in use in Canada do n not have that capacity. Without this cap pacity, orders from a client could not be entered directly to a smart order rrouter without passiing have been set by the t through automaated controls that h Participant. do not comply with w marketplace and regulatory requirrements -systematically prevent one or more orders frrom exceeding pre-de etermined credit and capital thresholds. monitor for unau uthorized access to trading g systems of Participant or Access Person. Policy 7.1 – Trading Super rvision Obligationss rect Electronic Acce ess Part 7 - Specific Provisionss Applicable to Dir Trading ssupervision related to t electronic access to marketplaces mu ust be performe ed by a Participantt or Access Person n in accordance with w a documen nted system of risk management m and sup pervisory controls, policies p and proccedures reasonably designed to ensure the management of o the financial, regulatory and oth her risks associated with electronic acce ess to marketplaaces. The risk management and supervisory s controls,, policies and proce edures d by a Participant or Access A Persons must include: employed auto omated controls to o examine each orrder before entry on a marrketplace to prevent the entry of an order which w would result in n: tthe Participant or Acccess Person exceeding pre-determined cre edit or ccapital thresholds, a client of the Participant exceeding pre-d determined credit orr other limits assigned by the e Participant to that client, or tthe Participant, Access Person or client off the Participant exce eeding pre-determined limits on the value or volume of unexecuted orders o ffor a particular securiity or class of securitie es; pro ovision to prevent th he entry of an order that is not in comp pliance witth Requirements; IIROC has revise ed the Guidance on n Electronic Trading to clarify this point. RBC – Req quests that IIROC outtline the specific preeorder entry y checks that deale ers are expected to o implement on a real-time basiss. Suggests that thee nt be standardized to t that provided fo or requiremen under Natiional Instrument 23 3-103, namely “thaat must be sattisfied on a pre-order entry basis”. prov vision of immediate order o and trade information to compliancce staff of th he Participant or Acce ess Person; and regu ular post-trade monito oring for compliance with Requirements. A Particip pant or Access Person is responsible and acccountable for all fun nctions that they outsource to a service provider as set ou ut in Part 11 of Comp panion IIROC Notiice 12-0363 – Ruless Notice – Notice of Approval A – UMIR – Provisions P Respectin ng Electronic Trading g The minimum “aautomated controls” are set out in the three sub-bullets conttained in the first bu ullet. In particular, the t automated contrrols must examine eaach order before entry y of on a marketpla ace [emphasis added]] to prevent the entry an order which w would result in: the Participant or Access P Person exceeding prep d credit or capital thre esholds, determined ned a client off the Participant excceeding pre-determin credit or otther limits assigned b by the Participant to that client, or the Particcipant, Access Person or client of the t Participantt exceeding pre-dete ermined limits on the t 30 Text o of the Provision ns Approval of the Amendme ents (Revisiions to the Proposed Amendm ments Highligh hted) Comm mentator and Summary S of Commen nt IIROC Ressponse to Commentator and Addittional IIROC Commentary value or vo olume of unexecuted d orders for a particu ular security or class of securities. Policy 31-103CP Registration Requirements R and Exem mptions. Superviso ory and compliance monitoring procedu ures must be design ned to detect and prevent account activity that is or may be a violation of ments which includess applicable securities legislation, requirements Requirem of any se elf-regulatory organization applicable to th he account activity an nd the rules and d policies of any ma arketplace on which the account activity y takes place. Th hese procedures must include “post-orderr entry” compliance testing t enumeratted under Part 1 off Policy 7.1 to dete ect orders that are not n in complian nce with specific rule es, and by addressing g steps to monitor trrading activity, aas provided under Part P 5 of Policy 7.1, of any person wh ho has multiple accounts, with the Participant and other accounts in whicch the person haas an interest or over which the person has direction or control. The second bulle et which requires the e risk management and a supervisory controls, policies and procedures to inclu ude provision to pre event the entry of aan order that is not in compliance with h Requirements is, in effect, for Participantts a ovisions under Rule 7.1. 7 restatement of aan existing UMIR pro In particular, Rule e 7.1(2) requires: “Prior to th he entry of an order on a marketplace by y a Participant, the Participant shall ccomply with: (a) applicaable regulatory stand dards with respect to the t review w, acceptance and app proval of orders; (b) the p policies and proccedures adopted accord dance with subsection n (1); and (c) in all requ uirement of UMIR and d each Policy.” The inclusion off this bullet in Part 7 of Policy 7.1 has the t effect of extending the requirement to Access Persons who w have electronic aaccess to a marketplacce. TD – Would like to confirm th hat in cases when an n order is entered on a ma arketplace with thee nt of a trader that the e trader may continuee involvemen to perform the trade supervision n function rather than n a controls for f trade supervision n. relying on automated Believes tha at it is not feasible to o apply an automated d pre-trade co ontrol to limit a clien nt’s settlement risk o or margin req quirements on a real-time basis across alll asset classes or all electronic acccess channels. Similaar problems would w be encountered d for capital limits fo or internal trad ders. Policy 7.1 must be read in its entiretty. Various parts of the t Policy deal witth different means by which orders are “received” by a Participant and how w the Participant entters y is derpinning the Policy those orders on a marketplace. Und g of the requirement for enhanced superv vision and monitoring by traders or registerred orders that are not inter-mediated b ved he Participant. Orde ers which are receiv employees of th ace electronically by a Participant and en ntered on a marketpla nt electronically witho out intermediation by a by the Participan ntry registered emplo oyee will be subject tto automated pre-en controls which rreflect that fact. No onetheless, if orders are intermediated, the Amendments will require that there be entry controls that aare appropriate to the t automated pre-e ong orders being enttered by that trader.. For example, amo the appropriate aautomated pre-entry y controls would be “fat “ finger” checks an nd value limits applicaable to the trader. The Amendmentts do not require on ne aggregate client risk r calculation across different electron nic access channels or mit a separate limit to be asset classes. The Amendments perm each channel or assett class. Participants are determined for e IIROC Notiice 12-0363 – Ruless Notice – Notice of Approval A – UMIR – Provisions P Respectin ng Electronic Trading g 31 Text o of the Provision ns Approval of the Amendme ents (Revisiions to the Proposed Amendm ments Highligh hted) Comm mentator and Summary S of Commen nt IIROC Ressponse to Commentator and Addittional IIROC Commentary able to continue to assess the aggregate client risk on a po oste Amendments permit capital limits on ea ach trade basis. The access channel iindependently and P Participants are able to continue to asse ess aggregate marke et risk on a post-tra ade basis. IIROC has modiffied the Guidance on Electronic Trading to clarify these poin nts. A drafting error has been corrected d by deleting the wo ord he title of Part 7. In IIROC Notice 12-020 00, “Direct” from th the text of the prroposed provision waas correct in Appendix B but the draft o of the proposed am mendments set out in Appendix A conttained the word. Policy 7.1 – Trading Super rvision Obligationss Part 8 - Specific Provisionss Applicable to Auttomated Order Sysstems Trading ssupervision by a Partiicipant or Access Persson must be in accorrdance with a documented system of o risk management and supervisory controls, policies aand procedures reaso onably designed to ensure e the management of the finan ncial, regulatory and d other risks associated with the use of an automate ed order system by th he Participant, the Acccess Person or any cliient of the Particcipant. Each Parrticipant or Access Person P must have a level of knowledge and understanding of any automated order system ussed by the Participan nt, the erson or any client of o the Participant tha at is sufficient to allo ow the Access Pe Participan nt or Access Person to identify and manag ge the risks associated d with the use o of the automated orde er system. The Partiicipant or Access Person must ensure th hat every automated order system u used by the Particip pant, the Access Perrson or any client of o the Participan nt is tested in accord dance with prudent business practices in nitially before u use and at least ann nually thereafter. A written record mu ust be maintained with sufficient details to demonstrate the testing of o the ed order system und dertaken by the Partiicipant, Access Person and automate any third d party employed to o provide the autom mated order system or o risk managem ment or supervisory controls, c policies and procedures. The scope of appropriate order and trade parameters, policiess and procedurres should be tailored d to the strategy or sttrategies being pursu ued by an autom matic order system with w due consideratio on to the potential market m impact off defining such param meters too broadly an nd in any event must be set IIROC Notiice 12-0363 – Ruless Notice – Notice of Approval A – UMIR – Provisions P Respectin ng Electronic Trading g 32 Text o of the Provision ns Approval of the Amendme ents (Revisiions to the Proposed Amendm ments Highligh hted) Comm mentator and Summary S of Commen nt IIROC Ressponse to Commentator and Addittional IIROC Commentary CIBC – “Exxtremely challenging g” to meet the March h 1, 2013 ta arget implementatio on date of Nationaal Instrument 23-103. Encouragess IIROC to allow for a longer impllementation period. Points to the fact thaat it took 13 months m to implemen nt Rule 15c3-5 in thee US. CIBC C sees “risks associated with a poorlyy designed or o poorly implemen nted solution”. In n particular, CIBC notes that opttions and derivativess t Montreal Exchan nge are subject to N NI traded on the 23-103 an nd they seek grea ater clarity on thee o a Unlike NI 23-103 3, the UMIR provisio ons will only apply to single asset classs, namely listed eq quities (as UMIR is not n applicable to the e trading of fixed income or derivatives). so as nott to exceed the marke etplace thresholds app plicable to the marke etplace on which h the order is entered d or would otherwise e exceed the limits pu ublicly disclosed d by the Market Regu ulator for the exercise e of the power of a Market M Integrity Official under Rule 10 0.9 of UMIR. The Markket Regulator expects the risk managemen nt and supervisory controls, policies aand procedures to co omply with the Electrronic Trading Rules and a be reasonab bly designed to preve ent the entry of any order that would intterfere with fairr and orderly mark kets. This includes adoption of comp pliance procedurres for trading by clie ents, if applicable, containing detailed guiidance on how ttesting of client orders and trades is to be e conducted to ensurre that prior to e engagement and at least annually thereaffter, each automated order system iis satisfactorily teste ed assuming variouss market conditionss. In o systems, preve enting addition to regular testing of the automated order nce with fair and orderly o markets requ uires development of o preinterferen programmed internal parame eters to prevent or “fflag” with alerts on a realdes by an automated d order time basiis, the entry of orders and execution of trad hat exceed certain volume, order, price or other limits. system th Each Parrticipant or Access Person P must have the t ability to immed diately override or disable automaticcally any automated order system and th hereby prevent o orders generated by the t automated order system from being en ntered on any m marketplace. Notwithstanding any outsou urcing or permitted d authorization ove er risk ment and supervision controls, a Participant or Access Persson is managem responsib ble for any order enttered or any trade ex xecuted on a markettplace, including g any order or trad de resulting from th he improper operation or malfunction of the automate ed order system. This T responsibility inccludes e to a “runaway” algo orithm instancess in which the malfunction which gave rise is attributed to an aspect of the algorithm or auttomated order system m that “accessible” to the Pa articipant or Access Pe erson for testing. was not “ General Comments IIROC Notiice 12-0363 – Ruless Notice – Notice of Approval A – UMIR – Provisions P Respectin ng Electronic Trading g While the amen ndments will be effective March 1, 2013, IIROC recognizes that additional tim me may be required to OC g of automated pre--trade controls. IIRO complete testing expects that Parrticipants will use be est efforts to complete testing and impllement such controlss by March 1, 2013 but b 3 at IIROC will permiit testing to continue e until May 31, 2013 33 Text o of the Provision ns Approval of the Amendme ents (Revisiions to the Proposed Amendm ments Highligh hted) Comm mentator and Summary S of Commen nt IIROC Ressponse to Commentator and Addittional IIROC Commentary implementa ation of pre-trade credit c thresholds fo or those asset classes. Suggests a phased introduction n e of pre-trade controll. by either assset class and/or type As recognizzed in the US with h the Knight Capitaal issues, technical changes at the marketplace level can n h the participant and d have a severe impact for both ves that there should d overall marrket integrity. Believ be a “pause” in allowing marke etplaces to introducee ents. enhanceme which time IIROC expects testing to o be complete and that the automated co ontrols will be fully o operational. While IIROC is cognizant of the regu ulatory burden which h is being imposed on marketplaces, P Participants and Access ves, the initiatives ha ave Persons as a ressult of recent initiativ dealt with dev velopments in the market for which a regulatory respo onse was considere ed appropriate. Ass a regulation services provider, IIROC C’s primary role with w nts” is to ensure they do respect to “markketplace enhancemen not interfere with h a “fair and orderly” market. IIAC – Gen nerally supportive off the objective of thee Proposed Amendment A but ha as serious concernss about the implementation period. Notes that IIAC C c conduct their t business using g members currently many different systems which are combinations o of proprietary and third party syste ems. Significant workk to develop, test and implement. nction with the CSA, conducted a survey y of IIROC, in conjun IIAC members on their preparednesss for implementation of ETR on March 1, 2013. The ressponses indicated that ng time may be needed or would be additional testin desirable. The responses confirme ed that there were no uld ns of the Proposed A Amendments that cou specific provision not be impleme ented by March 1, 2 2013. See response to CIBC above regarding the provision n of additional time to complete testing g of automated pre-traade controls. Scotia – Believes B that the most reliable place to o protect aga ainst “flash crash” typ pes of events is at thee marketplace e level. The planned marketplacee thresholds are a good step butt suggests additionaal ents: enhanceme na While marketplaces have a role, the marketplace is not in k to position to know w if orders from a partticular client are a risk ace the Participant as well as to the integ grity of the marketpla overall. order activity limits (on th he number of orders rs from an individual trading ID I or the markets as a whole)); notional limits (on each tra ading ID as specified d by the Participant); and automated access to disab ble trading IDs (moree flexible e functionality to the cancel-on-disconnecct service e that many marketpla aces already offer). Scotia – Project plans from ven ndors generally leavee approximattely two months for testing and d st deployment. March 1 implem mentation leaves “no o d margin for issues or delays and would be considered IIROC Notiice 12-0363 – Ruless Notice – Notice of Approval A – UMIR – Provisions P Respectin ng Electronic Trading g ma ding IDs often bundle e together orders from “Individual” trad ore number of clientts or sources. In the v view of IIROC, it is mo appropriate for the Participant to e enforce these types of t limits at the acccount or client level. This ensures that the o a Participant is be etter able to contro ol their own risk to particular client but the interests of o other clients or sources oes ot compromised if a p particular account go or orders are no “off side”. The Amendmentts will be effective March 1, 2013, the same date as the ETR R. However, IIROC has acknowledged the t significant syste ems impact of imp plementing automatted C is controls prior to o order entry on a marketplace. IIROC 34 Text o of the Provision ns Approval of the Amendme ents (Revisiions to the Proposed Amendm ments Highligh hted) Comm mentator and Summary S of Commen nt IIROC Ressponse to Commentator and Addittional IIROC Commentary ‘best case’ scenarios”. s Believes that t an extension of 3 months is absolutely necessary y and that 6 monthss o feedback … from m may be prrudent “depending on other particcipants”. therefore permitting a period for additional testing, if May 31, 2013. necessary until M IIROC Notiice 12-0363 – Ruless Notice – Notice of Approval A – UMIR – Provisions P Respectin ng Electronic Trading g 35
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