CSA/IIROC Notice 23-315
Summary of Comments on CSA/IIROC Notice 23-312 Request for
Comments – Transparency of Short Selling and Failed Trades
February 28, 2013
Introduction
The Canadian Securities Administrators (CSA) and the Investment Industry Regulatory
Organization of Canada (IIROC) published for comment a joint notice (Joint Notice) on
transparency of short selling and failed trades on March 2, 2012.
1
This notice summarizes the
comments received on the Joint Notice and provides the CSA’s and IIROC’s response to those
comments and an update on recent international developments.
Substance & Purpose
The purpose of the Joint Notice was to:
•
explain the approach taken by a working group (the “Working Group”) of CSA and
IIROC staff to issues regarding the regulation of short sales and failed trades;
•
provide a background on CSA and IIROC regulation of short sales and failed trades in
Canada;
•
provide an overview of recent international developments regarding the regulation of
short sales and failed trades; and
•
solicit feedback on whether further measures are needed or desirable to:
(i)
enhance the regulatory reporting and transparency of short sales, or
(ii)
introduce some transparency of failed trades in Canadian markets.
The comment period closed on May 31, 2012. We received six
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comment letters in response to
the Joint Notice. We have considered the comments received and thank all of the commenters
for their submissions. A list of those who submitted comments and summary of the comments
are attached as Appendix A to this notice.
There was no clear consensus among the commenters that specific improvements were needed;
the majority of respondents believe that the current requirements in the Universal Market
1
See Request for Comment - CSA-IIROC Joint Notice 23-312 Transparency of Short Selling
and Failed Trades, March 2, 2012 (2012) 35 OSCB 2099.
2
An additional comment letter was received that commented only on IIROC Notice 12-0079 –
Rules Notice – Request for Comments – UMIR - Proposed Guidance on “Short Sale” and
“Short-Marking Exempt” Order Designations (March 2, 2012) and is not summarized in this
notice. That comment letter is summarized in IIROC Notice 12-0301 - Rules Notice –
Request for Comments – UMIR – Summary of Comments Received Respecting Proposed
Guidance on “Short Sale” and “Short-Marking Exempt” Order Designations (October 11,
2012).
Integrity Rules (UMIR), including amendments that became effective on October 15, 2012
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(UMIR Amendments), are adequate. The UMIR Amendments included IIROC’s new short-
marking exempt order rule, which requires purchase and sale orders for accounts that in the
ordinary course do not take a directional position with respect to the trading of a security to be
identified as such.
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Orders that are marked as “short-marking exempt” no longer are marked as
“short”.
Response to the Comments
After reviewing the comments, data on short sales and failed trades and recent international
developments in the regulation of short sales and failed trades, the Working Group does not
believe that additional measures are needed or desirable at this time beyond those described
above.
IIROC intends to update empirical studies it previously undertook to determine the effect, if any,
of the UMIR Amendments on trends in trading activity, short sales and failed trades.
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The
updates by IIROC of the empirical studies will include data for the one year period following the
implementation of the UMIR Amendments. The Working Group believes that it would be
prudent to await the results of the empirical studies which will help to inform the discussion of
whether additional measures may be either needed or desirable in the regulation of short sales
and failed trades or to improve transparency.
The Working Group will also continue to monitor international developments
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in the regulation
of short sales and failed trades, as well as other short-selling and failed-trades related issues that
may need to be addressed in future notices or regulatory proposals.
3
See IIROC Notice 12-0078 - Rules Notice – Notice of Approval – UMIR - Provisions
Respecting Regulation of Short Sales and Failed Trades (March 2, 2012) and IIROC Notice
12-0158 - Rules Notice – Notice of Implementation – UMIR - Changes to Implementation
Date for Provisions Respecting Regulation of Short Sales and Failed Trades and for
Provisions Respecting Dark Liquidity (May 8, 2012).
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UMIR 6.2(1)(b)(ix). Generally speaking, client accounts which would use the “short-
marking exempt” designation must have fully-automated order generation and entry and have
at the end of each trading day only a nominal position, either long or short, in a particular
security. For more information on the use of the short-marking exempt order designation,
see IIROC Notice 12-0300 – Rule Notice – Guidance Note – UMIR - Guidance on “Short
Sale” and “Short-Marking Exempt” Order Designations (October 11, 2012).
5
See IIROC Notice 11-0078 – Rules Notice – Technical – UMIR – Trends in Trading Activity,
Shorts Sales and Failed Trades (for the period May 1, 2007 to April 30, 2010) (February 25,
2011) and IIROC Notice 11-0077 – Rules Notice – Technical – UMIR – Price Movement
and Short Sale Activity: The Case of the TSX Venture Exchange (for the period May 1, 2007
to April 30, 2010) (February 25, 2011).
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The following is a summary of international developments in the regulation of short sales and
failed trades since the issuance of the Joint Notice on March 2, 2012:
•
European Union (EU) - Effective November 1, 2012, the Regulation on Short Selling and
Credit Default Swaps seeks to ensure member states have clear powers to intervene in
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exceptional situations, create a harmonized framework for coordinated action by the
European Securities and Markets Authority (ESMA), increase transparency on short
positions held by investors in EU securities, reduce settlement risks due to naked short
selling and reduce risks to the stability of the sovereign debt markets. In particular, the
Regulation on Short Selling and Credit Default Swaps:
1.
Introduces a requirement that investors disclose significant net short positions in
shares to regulators at 0.2% of the issued share capital, and to the public at 0.5%;
2.
Introduces a requirement that investors notify regulators of significant net short
positions in EU sovereign bonds, including notification of significant credit default
swap positions relating to sovereign debt issuers;
3.
Gives ESMA the power to intervene in response to threats to financial markets, if the
EU national regulator has either failed to act or to do so adequately, and adopt
temporary measures with the effect of prohibiting or restricting short selling;
4.
Gives the EU national regulators the power to require further transparency or restrict
short selling and certain derivative transactions for a wide range of instruments in the
case of adverse developments that constitute a serious threat to financial stability or
market confidence in the EU or a Member State;
5.
Gives the EU national regulators the power to restrict short selling or limit
transactions in a financial instrument if the price of that financial instrument falls by a
significant amount (10% from the previous day’s close in the case of liquid shares
with the restriction lasting up to the end of the trading day following the day the price
of the financial instrument fell, unless the price falls further);
6.
Introduces a pre-borrow or “locate” type requirement where an investor, before
entering a short sale for shares or for sovereign debt, would be required:
•
to have borrowed the instruments concerned,
•
to have entered into an agreement to borrow the instruments in order to deliver
them by the settlement date, or
•
to have an arrangement with a third party to locate the instruments concerned and
to have a “reasonable expectation” of being able to borrow them to affect
settlement when it is due;
7.
Requires central counterparties in the EU to ensure that there are adequate
arrangements in place for the buy-in of shares if there is a failure to settle a
transaction, and requiring that daily fines be imposed for non-settlements;
8.
Introduces a ban on holding an uncovered credit default swap position in EU
sovereign debt; and
9.
Provides an exemption from the regulation for market making and primary market
operations, and for shares whose principal trading venue is outside the EU.
On September 17, 2012, ESMA published a consultation paper, setting out draft
guidelines on market making and the application of exemption for market making
activities and primary market operations under the Regulation on Short Selling and
Credit Default Swaps.
•
Hong Kong - On June 18, 2012, the Securities and Futures Commission of Hong Kong
(the “SFC-HK”) adopted a rule that, among other things,
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Recent Developments
Effective June 1, 2011, IIROC implemented a requirement to file an “Extended Failed Trade
Report” if a trade that was executed on a marketplace and was to settle through the continuous
net settlement (CNS) facilities of CDS Clearing and Depository Services Inc. (CDS) failed to
settle on the settlement date and remained unresolved for ten trading days following the
settlement date. Since its introduction, IIROC has received an average of 24 Extended Failed
Trade Reports per month (during a period when the number of trades per month ranged from a
low of almost 24 million to a high of 39 million). The number of Extended Failed Trade Reports
which has been filed to date is in line with expectations and these reports have not indicated any
unusual patterns or trends. Effective April 15, 2013, the requirement to file an Extended Failed
Trade Report will be extended to trades using the “Trade-for-Trade” settlement facility of CDS
(which generally represents less than 10% of trades in listed equity securities).
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Based on test
data which IIROC has received from CDS, IIROC expects to receive only a limited number of
additional reports when the requirement is extended to “Trade-for-Trade” settlements.
CDS also provides regular information to the Ontario Securities Commission (OSC) on failed
trades in CDS’ CNS system. This information has not shown any trends that would give rise to
concerns about fails. We will continue to monitor this information.
As of January 2013, IIROC is publishing semi-monthly a summary of short sales on Canadian
marketplaces for every listed security.
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This short sale summary is in addition to the
“Consolidated Short Position Report,” which will continue to be produced on the same semi
monthly basis.
1.
introduces a requirement for weekly reporting of short positions in specified shares
that exceed on a net basis either: 0.2% of the issued share capital or HK$30 million.
This requirement applies to both covered and uncovered short positions;
2.
applies to positions taken through the Hong Kong Stock Exchange or an authorized
automated trading system specified by the SFC-HK;
3.
applies to shares that are constituents of the Hang Seng Index or the Hang Seng
Enterprises Index, and to designated financial stocks and any other security
designated by the SFC-HK; and
4.
allows the SFC-HK to require daily reporting of short positions when needed, if the
financial stability of Hong Kong is threatened.
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For details on the extension of the reporting requirement, see IIROC Notice 13-0014 - Rules
Notice – Technical – UMIR - Implementation Date for the “Trade-for-Trade” Reporting of
Extended Failed Trades (January 14, 2013).
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The report is available on the IIROC website at: http://www.iiroc.ca/news/Pages/Short-
Sale.aspx . For details on the report, see IIROC Notice 13-0020 - Rules Notice – Technical
– UMIR – Issuance of Initial Short Sale Trading Summary Report (January 21, 2013).
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Also commencing in 2013, new international standards governing financial market
infrastructures (FMIs) will require FMIs such as CDS to disclose to the public certain basic data
on transaction volumes and values, including information on the timeliness of settlements.
Questions
Please refer your questions to any of the following CSA or IIROC staff:
Bonnie Kuhn
Manager, Legal
Alberta Securities Commission
403-355-3890
bonnie.kuhn@asc.ca
Michael Brady
Senior Legal Counsel
British Columbia Securities Commission
604-899-6561
mbrady@bcsc.bc.ca
Paula White
Manager Compliance and Oversight
Manitoba Securities Commission
204- 945-5195
paula.white@gov.mb.ca
Chris Pottie
Manager, Compliance,
Policy and Market Regulation Branch
Nova Scotia Securities Commission
902-424-5393
pottiec@gov.ns.ca
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See Principle 23 on the disclosure of rules, key procedures and market data of the April 2012
report Principles for Financial Market Infrastructures published by the Committee on
Payment and Settlement Systems (CPSS) and the Technical Committee of the International
Organization of Securities Commissions (IOSCO) (available online at
http://www.iosco.org/library/pubdocs/pdf/IOSCOPD377.pdf). The CPSS and IOSCO are
currently developing a framework for setting out a common set of quantitative information
that an FMI should disclose regularly.
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Serge Boisvert
Analyste en réglementation
Direction principale de l'encadrement des
structures de marché
Autorité des marchés financiers
1-877-525-0337 ext. 4358
serge.boisvert@lautorite.qc.ca
James Twiss
Chief Market Policy Adviser,
Investment Industry Regulatory Organization
of Canada
416-646-7277
jtwiss@iiroc.ca
Jason Alcorn
Legal Counsel
New Brunswick Securities Commission
506-643-7857
jason.alcorn@nbsc-cvmnb.ca
Timothy Baikie
Senior Legal Counsel, Market Regulation
Ontario Securities Commission
416-593-8136
tbaikie@osc.gov.on.ca
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Maxime Paré
Senior Legal Counsel, Market Regulation
Ontario Securities Commission
416-593-3650
mpare@osc.gov.on.ca
Dean Murrison
Director, Securities Division
Saskatchewan Financial Services Commission
306-787-5879
Dean.Murrison@gov.sk.ca
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Appendix A
Summary of Comments
Comment letters were received from:
•
TD Asset Management
•
OpsRisk Limited
•
Investment Industry Association of Canada (IIAC)
•
Caisse de dépôt et placement du Québec
•
CNSX Markets Inc.
•
Canadian Foundation for Advancement of Investor Rights (FAIR Canada)
The comment letters are available on the OSC’s and IIROC’s websites (www.osc.gov.on.ca;
www.iiroc.ca)
Question 1: Do you believe that more frequent aggregate short sale summaries should be
made publicly available? If so, what should be the frequency of such short sale summaries
(e.g. weekly, daily)? What would be the costs and benefits to issuers, investors and
Participants from making this information public?
One commenter believed that existing order marking requirements were sufficient to detect
abusive activity. Further, if a reporting requirement is implemented, it should only be to the
regulator, as a short sale summary report could be misleading without access to trade data on all
domestic and foreign markets on which a security trades. Publishing the report could also result
in gaming. Another commenter believed that more current data may inform better investment
decisions.
There was no consensus on the ideal frequency of short sale summaries, with one commenter
suggesting weekly, another semi-monthly and a third suggesting that monthly reporting would
not be sufficient.
As noted above, IIROC now publishes a semi-monthly summary of short sales on Canadian
marketplaces in addition to the consolidated short position report.
Question 2: In addition to semi-monthly (or more frequent) aggregate short sale summaries,
should there be public disclosure of individual short sale transaction data on an anonymous
basis? If so, should the publication of this information be time deferred (e.g. one day, one
month, etc.)? What would be the costs and benefits to market participants from making this
information public?
Letters that specifically responded to this question did not support disclosure of individual short
sale data. One noted that short sales are often part of a complex strategy and details of individual
sales would not be useful. Another agreed that anonymous information would not provide
sufficient information to discern patterns or a trading strategy, and so would not be more useful
than aggregate data.
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One commenter noted that the short sale marker is intended to identify potentially abusive
behaviour, not to provide information, and that the information could be misleading as many
short positions are offset.
Another commenter stated that if this requirement is adopted, it should be on an anonymous
basis unless there is a size threshold for public disclosure. The commenter added that it should
not be necessary to defer publication provided an investor has an opportunity to request an
exemption from immediate reporting.
Question 3: Should data on the usage of the “short-marking exempt” designation in relation
to trading activity of a particular security be made publicly available? If so, what should be the
frequency of the release of such data?
Two commenters believed the information would be of limited or no use. Another believed it
would be useful, but not as useful as information on directional short sales, and might not need to
be reported as frequently as directional short sales.
Question 4: Is the existing public disclosure of short positions adequate? If not, should the
information be available for unlisted securities such as debt securities and foreign-listed
securities traded on alternative trading systems? Should there be one report covering all
securities traded on marketplaces? Should custodians and dealers that are not Participants
report their short positions?
Two commenters believed that in theory short reports should cover all securities and entities.
However, they noted that it may be unduly costly to expand the requirement, there may not be
demand for information about foreign-listed and debt securities, and requiring custodians and
non-Participants to report may not result in data that is materially different from what is
contained in existing reports.
One commenter believed the current data is inaccurate and misleading, and regulators should
rely instead on IIROC’s ability to monitor short selling activity.
One commenter believed the 100 largest short positions in TSX-listed securities and the 100
largest changes in short position in those securities should be published. In addition, public
disclosure of individual short positions should be required when a threshold (e.g. 5%) is crossed.
Question 5: Is the information in the Consolidated Short Position Report (CSPR) timely?
Should this information be made available on a more frequent basis?
One commenter believed that CSPR information is timely and sufficient and the cost of more
frequent reporting needs to be considered. Another believed the CSPR is inaccurate and should
be discontinued.
Question 6: Currently, are measures for failed trades transparency warranted? If you agree:
•
What types of information on failed trades would be most useful to participants (some
options are described above) and what should be the frequency of such disclosure?
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•
In addition to equity and other securities processed through the CNS facilities at CDS,
do other types of securities or products (e.g. fixed income securities) have FTD rates
suggesting that similar failed trade transparency measures should apply to those
securities? Please be specific in your answer.
•
What would be the costs and benefits, if any, to market participants in implementing
such measures?
If you believe that measures for failed trades transparency are currently not required, why do
you think this information would not be helpful to issuers, investors or Participants?
Two commenters noted that previous IIROC studies showed that fails are not a problem in
Canada and that IIROC and the OSC receive fails-to-deliver data from CDS. One of those
commenters added that it will be difficult for Participants to assess and analyse the data. The
other commenter suggested that, instead, regulators consider a larger, full review of aged fails,
both long and short and including debt securities, with a focus on recurring names and
Participants.
One commenter believed more extensive failed trade reporting was needed. Data on fails and
short interest are necessary for ongoing monitoring and analysis of operational risk, and better
data is available in the United States. The commenter stated that the magnitude, volatility and
pattern of short selling and fails are operational risks.
One commenter believed that failed trade reporting might better inform trading decisions, but
that the current UMIR failed trade reporting provisions were sufficient to identify problems.
General Comments
One commenter generally supported the proposed measures.
One commenter noted with respect to several of the options that any additional costs must be
weighed against the benefits.
One commenter generally believed that measures to increase transparency of short selling and
failed trades would only be useful to indicate potential problems in borrowing a security.
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