CIRO aims to beef up short-selling requirements

In an effort to address long-standing concerns by some market players about the adequacy of short-selling regulation, the Canadian Investment Regulatory Organization (CIRO) is proposing new guidance and requirements.

The self-regulatory organization issued proposals that would introduce a new requirement in the trading rules to create an obligation for traders to have a “reasonable expectation” that short sales can be settled prior to entering an order, along with new supervisory and gatekeeper requirements to enforce that new pre-trade provision.

The proposed rule changes are intended to ensure that short sales can be settled in a timely way, and to promote confidence in the market, the self-regulatory organization’s notice said.

CIRO also published proposed guidance for comment that aims to clarify the regulator’s expectations under both the new and existing requirements around short sales and failed trades.

Among other things, the proposed guidance addresses traders’ obligations when entering short orders, order marking requirements, what constitutes a failed trade, and the proposed new settlement requirement.

The proposals follow a recent joint consultation by the SRO and the Canadian Securities Administrators (CSA) on the regulatory framework for short-selling, amid ongoing concerns about the existing regulation in this area that have been repeatedly raised by some in the industry.

For instance, the final report of Ontario’s Capital Markets Modernization Taskforce in 2021 concluded that the existing regulation isn’t stringent enough to prevent abusive short-selling behaviour, and it called for tougher rules, including stricter settlement requirements, mandatory buy-in obligations for failed trades, and a prohibition on short-selling in connection with prospectus offerings and private placements.

“Along with CSA staff, we will continue to explore other areas of short-sale regulations where additional regulatory measures may be appropriate, including but not limited to mandatory close-out requirements,” the SRO said in a notice on Thursday outlining its proposals.

The proposed rule changes and revised guidance are now out for a 90-day public comment period, ending April 12.

Assuming that the proposals are adopted, the new requirements would be subject to at least a 90-day implementation period.

“We are mindful of the fact that the industry is currently preparing to move to a T+1 settlement cycle in 2024 and would not impose an effective date before the implementation to T+1 is completed,” the SRO said in its notice.