OSC to issue trade through release

(May 26, 2005) A concept paper on trade throughs will be issued by the Ontario Securities Commission (OSC) sometime this summer, assistant manager for market regulation Susan Greenglass told a recent compliance conference in Toronto. Release is tentatively set for late June or early July.

She indicated the OSC is looking at the new National Market System regulations implemented in the U.S. Those rules allow trade-through activity but Greenglass stressed it’s not a foregone conclusion similar allowances will be adopted here.

“There should be an open and clear debate for this in Canada,” she said. “In light of developments in other jurisdictions, we think it’s important to look at this.”

A trade through generally takes place when a market participant executes an order at a price inferior to best bid or ask, or when inferior orders trade ahead of better-priced orders. The paper will be well-timed because Ontario is about to see the introduction of its first equity-based Alternative Trading System (ATS) called Markets Inc.

Market regulator RS issued temporary rules earlier this month aimed at ensuring better-priced orders trade first in competitive marketplace situations.

Greenglass noted trade-through issues are a component of the best execution debate. That larger topic is the subject of an OSC concept release on which comment letters are now being reviewed. Examination of those comments will involve CSA staff and determine whether any changes to OSC’s policies are necessary.

John Reilly, a managing director at RBC Capital Markets, urged the OSC to bring RS into the discussions about how best execution will be defined going forward. “RS is our regulator and I’d like to see some integration,” he said. Greenglass assured him that would happen.

Reilly also expressed concern about the schedule to implement the TREATS audit trail requirements. He said it will be difficult for smaller firms to comply by the January 2007 deadline and suggested implementation costs could lead to consolidation in the securities industry if regulators take a hard line. Greenglass said the reporting requirements already were in place and that TREATS simply represented a shift to electronic data transmission.

There were a couple of other compliance tips from the Strategy Institute conference. Susan Han, general counsel at AIM Trimark, advised her colleagues to read their directors and officers’ errors and omissions insurance policies in detail for clues about how their firm is perceived in the marketplace.

“These will give you a good idea how an outsider views your organization and its risk metrics,” she said. Han also said it’s important to document meetings and other key events and noted compliance must be undertaken as a process to compensate for staff turnover. “The market cycle will change. You can’t operate compliance based on one particular moment in time,” she said. “Don’t base procedures on whose bums are in the seats right now. Things will be different in 18 months.”

Elizabeth Jordan, a lawyer at Borden Ladner Gervais, said compliance staff should conduct internal audits to make sure procedures laid out in manuals are being followed. Compliance also should be involved in the recording of client complaints to make it easier to uncover recurring problems. “It’s all about risk management,” she stressed.

Filed by Philip Porado, Advisor’s Edgephilip.porado@advisor.rogers.com