CSA publishes framework for direct electronic access

National Instrument 23-103 Electronic Trading (NI 23-103)

Currently, the only rules regarding the provision of DEA are set by trading venues, and they are not uniform.

The CSA says that it believes that there are risks associated with providing a client with DEA, and that “to ensure these risks are appropriately managed it is important to institute a consistent framework for marketplaces and marketplace participants relating to the offering and use of DEA.”

The regulators say that, as dealers are accountable for all of the trading that takes place under their trading ID, firms face risks when they allow clients to use complicated technology and strategies, including high frequency trading strategies, through DEA. For example, a dealer may be held responsible for the execution of erroneous trades that occur via DEA, even when this could put it out of business. And, a dealer may be responsible for the lack of compliance with marketplace or regulatory requirements for DEA orders entered under its ID.

“Therefore, we think that appropriate controls are needed to manage the financial, regulatory and other risks associated with
providing DEA to ensure the integrity of the participant dealer, the marketplace and the financial system,” it says in its notice.

The rule changes impose requirements that aim to ensure that dealers are managing these risks appropriately; they require specific controls designed to reduce the risk of regulatory violations through DEA trading, and to better identify DEA trading.

At the same time, the Investment Industry Regulatory Organization of Canada (IIROC) has also finalized proposed amendments to its trading rules, which impose the same sorts of obligations on its members. IIROC’s notice says that, taken together, both sets of rules “create a new, more robust and comprehensive regulatory framework for third-party electronic access to marketplaces”, which take account of regulatory developments in other jurisdictions and align with principles put forth by the International Organization of Securities Commissions (IOSCO) on DEA.

The regulators have been working to update the regulation of electronic trading generally over the past couple of years, but the CSA’s proposed rule changes regarding DEA weren’t finalized at the same time as its other electronic trading rules (in June 2012) to allow the CSA and IIROC time to align their regimes. Since the 2012 proposals, the CSA has made several changes, including revisions to the definition of DEA, clarifying that registered dealers (such as mutual fund dealers and exempt market dealers) can’t be DEA clients, in order to prevent regulatory arbitrage; among assorted other, largely-technical changes. The new rules are slated to take effect March 1, 2014, and will change the title of NI 23-103 to Electronic Trading and Direct Electronic Access to Marketplaces.

“As technology advances and trading systems become increasingly complex, the regulation of direct electronic access has become ever more critical to the overall regulation of electronic trading,” said Bill Rice, chair of the CSA and chair and CEO of the Alberta Securities Commission (ASC). “While today’s announcement brings the amendments related to direct electronic access to a close, the CSA will continue to monitor technological advances and make the changes necessary to continue to protect the market and marketplace participants in this regard.”