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IIROC’s new rules for bond market surveillance

The TD Securities trading floor in Toronto.


Canada's securities industry regulator is getting ready to roll out changes to its bond trading rules, an effort it believes will increase industry transparency.

The Investment Industry Regulatory Organization of Canada said Thursday that it will change the reporting system for debt securities dealers. They will soon be required to report every trade on a daily basis, rather than weekly.

This move will align the fixed-income side of the market closer with equities, where computer surveillance of trades has been strict for years. The end goal is to make sure debt securities transactions are fairly priced.

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The new rules officially come into effect in two phases starting in November 2015, and they are meant to tighten up the current market trade reporting system (MTRS), which is based on weekly statistics that IIROC has said are not dependable enough, since methodologies differ among the firms.

Under the current reporting system, dealers issue a weekly aggregate transaction report to the Bank of Canada through MTRS. In the new system, called MTRS 2.0, IIROC dealer members will swiftly report to IIROC all of their over the counter debt security transactions, as well as those of their affiliates that are government securities distributors (GSDs). IIROC will then share the data with the Bank of Canada.

Canadian Securities Administrators have approved IIROC's changes, and the Bank of Canada has also had input.

This more frequent reporting system will be used to ensure the fair pricing of fixed income trades, IIROC says, and will crack down on front running, insider trading and price manipulation. (Here's a primer on why that's so important.)

The change comes as institutional and retail investment in bonds has increased. IIROC says debt market trading in Canada was about $11.9-trillion in 2013. By comparison, trades in the equity market reached $1.95-trillion last year.

IIROC first said it would change reporting requirements for banks and securities firms last year, but after seeking comment from the industry, it relaxed some of its proposals in January.

In IIROC's original proposal, the dealers had to submit their transaction data on the day after the trade was made (called T+1) at 2 a.m., but that was later relaxed to T+1 at 2 p.m., so long as the trade was made by 6 p.m. the day before. Trades made after 6 p.m. or on the weekend get an extra day before they must be reported. The timing remains the same on the final rules.

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From technology to staff, costs of the MTRS 2.0 system will be paid by the dealers, but the proposed fee model won't be published until the end of the year.

Some firms, in their submissions regarding the draft proposals, had expressed concern about the costs of these new reporting systems. On Thursday, IIROC acknowledged technology updates could be expensive for some small firms, but said that the costs were fair, in the scheme of things.

"We do not anticipate that [start-up costs] will be disproportionate to the benefit associated with the elimination of MTRS reporting that is currently done," IIROC stated.

IIROC estimates that it will oversee 90 per cent of the debt trading activity done by its members by the time the rule comes into effect.

"With this new system in place, we will be able to better monitor activity and ensure compliance with investor protection and market integrity requirements in a cost-effective manner," said Susan Wolburgh Jenah, chief executive of IIROC.

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