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IIROC Proposed Derivatives Modernization Rules
Letter Summary:
The draft amendments follow a review by IIROC of all its derivatives related rules to ensure they are clear, up to date, and consistent with regulations for securities-related activities. Stage 1 expands current regulation for futures and options to cover OTC derivatives by replacing and expanding various defined terms. IIROC is also proposing an expansion to the definition of an “institutional client” to include individuals with at least $10m of assets under administration and to non-individuals engaged in specified hedging activities. They further propose to expand many of the business conduct rules to derivatives activities, such as BCP requirements, sales conduct requirements, best execution and suitability. Cumulative loss limits would also be required for any type of derivative account offering, and additional account opening procedures and/or IIROC approval would be required prior to offering certain highly leveraged and complex products to retail clients. IIROC has also prepared a new draft risk disclosure statement for derivatives, and has suggested additional proficiency requirements for representatives (which would need to be worked on in conjunction with the CSA projects on proficiency and derivative registrations).
Overview of the Council’s Comments:
We are supportive of IIROC’s initiatives to review its Dealer Member rules for consistency with proposed CSA rules and to identify necessary clarifications, as well as identify inconsistencies in the treatment of listed and OTC derivatives. We believe IIROC should continue to consider how best to reduce regulatory burden without having a negative impact on investor protection, including by harmonizing rules where possible.
We agree with the proposal to broaden the definition of a derivative to detail the general features of a derivative and thus capture more instruments than futures contracts, futures contract options and options. We note however, that the definition of a listed derivative should not inadvertently include an ETF.
International derivatives participants are continuing to advance definitions and standards for the global derivatives marketplace, and it is important that the final definitions and scope of the rules be compatible with such evolving international standards.
With respect to the required monthly account statement, we are of the view that the economic exposure of the derivative product should be reported together with the market value, cash positions and other features of the derivative.
We are particularly supportive of the proposal to amend IIROC rules to require that the best execution obligation apply to all derivatives orders and transactions and include specific best execution considerations for listed derivatives and fair pricing considerations for OTC derivatives.