CIRO seeks new securities lending rules

The Canadian Investment Regulatory Organization (CIRO) is proposing revisions to the rules around retail securities lending arrangements to ensure that investors are protected, while also increasing flexibility for firms.

The industry self-regulatory organization (SRO) published a set of proposed rule changes that are intended to enhance regulation around retail fully paid securities lending programs by codifying investor protection measures, clarifying the requirements, and allowing different lending models and client types.

“Fully paid lending offers tangible benefits of unlocking assets for which there is market demand while generating additional income for the lending clients and their dealers,” the SRO said in a notice setting out its proposals. “At the same time, fully paid lending doesn’t come without risks, and it is therefore important that a client fully understand these risks before consenting to the dealer using their securities within their operations or lending them to others.”

The SRO said its proposals follow its review of the existing regulatory framework for fully paid lending along with its consultations with the SRO’s advisory committees and dealers that currently offer, or plan to offer, fully paid lending programs.

According to the notice, as of June 2023, there were eight firms offering fully paid lending and 165,000 clients enrolled in these programs, with about $500-million worth of securities on loan under the programs, which generated $18.8 million in total annual revenue that’s shared between dealers and clients.

“Borrowed securities are generally being used to lend to the Street, or cover dealer internal demand, for short selling, collateral requirements or settlement purposes,” it noted.

The SRO said dealers expect these arrangements to grow, and that more dealers have expressed interest in launching their own programs.

The proposals address a range of issues, from suitability to disclosure, as well as collateral rules along with asset use, record keeping and audit provisions, among other things.

CIRO said the proposals are intended to improve transparency and efficiency, without adding to firms’ overall regulatory burden.

While the proposals to standardize collateral requirements will likely require some dealers to add collateral, “We believe such costs are outweighed by the benefits of the added investor protection and consistency across the industry that this new requirement brings,” it said.

Alongside the proposed rule changes, CIRO released updated guidance in this area.

The proposals are out for comment until April 15.