IIROC to expand trading oversight of debt securities

This reporting, in turn, will allow IIROC to build a comprehensive database of transaction information and enable improved oversight of over-the-counter (OTC) debt trading. However, it does not currently plan to publicly report data regarding individual transactions. Instead, IIROC would continue to publish aggregate debt trading statistics. Along with the proposed rule, IIROC also published a proposed project plan for building a new debt market surveillance system to replace the existing Market Trade Reporting System (MTRS) operated by the Bank of Canada.

In a notice outlining its proposals, IIROC notes that while debt markets have historically operated on an OTC basis, with limited transparency, they have become a significant, and growing, portion of the total value of securities trading in Canada. In 2012, the value of secondary domestic bond market trading was approximately $10 trillion, it reports; and, money market trading represented an additional $6.7 trillion; compared with about $1.9 trillion in value traded for equities.

“As trading in all markets and instruments continues to evolve and the structure of many OTC-traded products becomes increasingly complex, it is important that regulators adapt their oversight activities to reflect these changes,” it notes. This has led to other rule changes in recent years, including the introduction of the OTC Securities Fair Pricing Rule and enhanced trade desk compliance examinations by IIROC. Yet, regulators remain concerned about the lack of systematic regulatory reporting, and transparency for investors. As a result, it’s proposing the new rule and database.

IIROC says its priorities with this project are to “strengthen the fairness and integrity of the debt markets”, to ensure compliance, and prevent abuses in areas such as best execution and fair pricing, front running, market manipulation, and suitability.

The regulator notes that discussions have taken place over a number of years to consider whether transaction data could be collected from a single source, such as the Canadian Depository for Securities (CDS), in order to avoid the requirement for individual dealer reporting. However, it says, “It was determined… that CDS is not a viable, comprehensive and exclusive source of the required data as it does not collect or receive any information regarding retail transactions, and existing CDS records are missing a number of the data elements that are critical to our overall objectives.”

So, the data will have to come from the dealers directly. IIROC says that it has consulted with dealers “who have confirmed that existing trade capture systems can be leveraged to create transaction files suitable for transmission to IIROC”; so, it does not expect the implementation costs to be disproportionate to its objectives.

Dealers will also be expected to fund the ongoing operation of the new database, including technology, staff and other direct costs, on a cost-recovery basis. That funding model, which may be based on transactions, will be developed separately and published for comment prior to implementation, IIROC notes.

IIROC’s notice also says that the reporting requirements will be implemented in phases depending on the type of instrument traded, and whether the dealer is a participant in the Bank of Canada’s existing reporting system.

“We are moving forward with these important initiatives because we recognize that robust regulatory supervision and oversight of the debt markets are critical to enhancing market integrity and investor confidence,” said IIROC president and CEO, Susan Wolburgh Jenah.

Comments on the proposals are due by May 22.