Regulators approve RS rules respecting off-marketplace trades

Canada’s securities regulators are adopting rule changes in an effort to accommodate the emerging multi-market environment. They have approved proposed revisions to the trading rules regarding “off-marketplace” trades, and are seeking comment on interim amendments to the best-price obligations.

According to a notice published today, securities regulators approved a variety of amendments to the Universal Market Integrity Rules that were proposed by Market Regulation Services Inc. (RS).

Among other things, the amendments:

> clarify the ability of market players to trade other than by entering orders on a marketplace;

> clarify the “best price” obligation to confirm that the obligation is to the “disclosed volume”; and

> provide a mechanism to cap the obligation to fill better-priced orders in the case of certain pre-arranged trades or intentional crosses.

The approved amendments have been revised from proposals published by RS back in April 2005, based on some of the comments received on that proposal.

The notice indicates that the amendments will, among other things, address certain regulatory uncertainties; eliminate the need for “wide distributions” as required by certain marketplaces; amend the formula used to determine when a “better price” exists on a foreign market and for reporting trades agreed to in a foreign currency; and introduce certain new definitions to the trading rules.

Along with the notice concerning amendments to deal with off-marketplace trading, RS also published a notice requesting comment on “interim” amendments that it has adopted to expand the factors that are to be taken into account in determining whether a market participant has made “reasonable efforts” to obtain the best available prices.

The proposed amendments are effective immediately, but RS said it considers them to be “interim” amendments because the Canadian Securities Administrators (CSA) is still developing a trade-through proposal. Depending upon the final form of this trade-through regime, changes may be required to the trading rules, in particular the “best price” obligation. The amendments therefore, may be varied or repealed following public comment and review by the regulators.

In adopting these interim amendments, RS has dropped an application it made to the regulators for an exemption from “best-price” obligations for certain transactions that it submitted in December 2007. “Since that time, based on discussions about this exemption with the recognizing regulators, RS has instead developed the interim amendments for immediate implementation and has therefore withdrawn the original application for approval of the exemption,” it explains.

The interim amendments provide that the regulators will accept that a participant has made “reasonable efforts” to comply with the “best price” obligation if they have: entered the order on a marketplace that will ensure compliance with the “best price” obligation; used an acceptable order router; or, provided the order to another participant for entry on a marketplace.

Along with expanding the factors that may be considered in living up to best price obligations, the amendments also remove transaction costs as a factor in determining the “best price” obligation and clarify that “reasonable efforts” do not necessarily require a participant to maintain a connection to each protected marketplace. Each participant must adopt policies and procedures to ensure compliance with its “best price” obligation, and they must review their policies and procedures on an ongoing basis to reflect changes to the trading environment and market structure.