RE:RE:123,000 share block traded by RBC at 1:31pm today.For those interested:
A trade of securities involving buy and sell orders for the same securities which are offset without recording the trade on the exchange. Pre-arranged cross trades are generally not permitted by most exchanges except in specific circumstances. For example, section 633(5) of the TSX Company Manual provides that a participating organization may distribute the whole of a control block sale to its own clients by means of a cross trade. Established crossing rules require that, prior to execution, all orders that are entered on any Canadian exchange at better prices than the price of the proposed cross trade must be filled in full. If the market is to be moved before execution of a cross trade, the responsible registered trader should be notified in advance. And:
A very good article for you to read:
PROCEDURES FOR HANDLING CERTAIN DESIGNATED TRADES AS
PRINCIPAL
Summary
This Rules Notice provides guidance on the procedures for the execution by a Participant as principal
of certain pre-arranged trades or intentional crosses that qualify as a “designated trade” 1 under the Universal Market Integrity Rules (“UMIR”) and which involve a distribution to clients of a significant
block of stock of a listed security.
Background
Effective May 16, 2008, UMIR was amended to provide a mechanism to cap the obligation of a
Participant, when acting as principal or agent, to fill better-priced orders in the case of designated
1
A “designated trade” is defined as an intentional cross or pre-arranged trade of a security made at a price that:
• would not be less than the lesser of:
o 95% of the best bid price, and
o 10 trading increments less than the best bid price; and
• would not be more than the greater of:
o 105% of the best ask price, and
o 10 trading increments more than the best ask price.
The definition does not impose any minimum volume or value requirements in order for an intentional cross of pre-arranged trade to
qualify as a “designated trade”.
IIROC Notice 09-0224 – Rules Notice – Guidance Note – UMIR – Procedures for Handling Certain Designated Trades as Principal
2
trades2 to those orders included in the “disclosed volume”. 3 To ensure that the better-priced orders
included in the disclosed value were protected, the amendments provided for the introduction of a
“bypass order”4 marker that would be attached to orders entered to meet best price obligations. The use of the bypass order marker would ensure that the order would not interact with hidden orders,
undisclosed portions of iceberg orders or Special Terms Order or other specialty orders. 5 In order to
provide marketplaces, Participants and service providers with time to amend their systems to
accommodate the bypass order, implementation of this portion of the amendments was deferred until
These amendments to UMIR eliminated the “uncertainties” surrounding the ability of a Participant to
“move the market” amidst the presence of orders with partially or fully undisclosed volume. On July
18, 2008, the Toronto Stock Exchange (“TSX”) repealed its wide distribution rules7 that permitted a dealer to “take-on” a principal trade “off-marketplace” in connection with “unwinding” trades to at
least 25 separate client accounts. The wide distribution rules capped the amount of “interference”
that the execution of the unwinding trades might encounter from “iceberg orders” and possibly
certain Special Terms Orders and other “specialty” orders. The TSX noted that “…the wide distribution
rules are no longer necessary as a result of the UMIR Amendments because the combination of bypass
orders and designated trades essentially duplicates the functionality currently provided through the
TSX wide distribution mechanism.”8 Under the wide distribution rules of the TSX, a dealer could make, subject to specific conditions, a pre-
arranged trade9 of a significant block of stock whereby the Participant would execute the “take-on” principal trade “off-marketplace” with the understanding that the Participant would immediately
2
For details of the various amendments to UMIR, see Market Integrity Notice 2008-008 – Amendment Approval – Provisions Respecting
“Off-Marketplace” Trades (May 16, 2008).
3
The term “disclosed volume” is defined as including the volume of orders on a protected marketplace at a price better than the price of
the intended trade but excludes:
•
the undisclosed portion of any iceberg order;
•
a Basis Order;
•
a Call Market Order;
•
a Market-on-Close Order;
•
an Opening Order;
•
a Special Terms Order; or
•
a Volume-Weighted Average Price Order.
4
Bypass Order means an order that is:
•
part of a designated trade; or
•
to satisfy an obligation to fill an order imposed on a Participant or Access Person by any Rule or Policy
and that is entered on a protected marketplace to execute as against the disclosed volume on that marketplace prior to the execution or
cancellation of the balance of the order.
5
UMIR defines a number of “specialty” types of orders such as: a Basis Order; a Call Market Order; a Market-on-Close Order; an Opening
Order; a Special Terms Order; or a Volume-Weight Average Price Order.
6
IIROC Notice 09-0034, Rules Notice – Guidance Note – UMIR – Implementation Date for the Marking of Bypass Orders (February 3, 2009).
7
TSX Rule Book, Rule 4-103 – Wide Distributions.
8
TMX Group Notice to Participating Organizations and Members 2008-030 (July 18, 2008).
9
A “pre-arranged trade” is defined as a trade for which the terms of the trade were agreed upon prior to the entry of either the order to
purchase or to sell on a marketplace by the persons entering the orders or by the persons on whose behalf the orders are entered.
IIROC Notice 09-0224 – Rules Notice – Guidance Note – UMIR – Procedures for Handling Certain Designated Trades as Principal
3
“distribute” the block of stock to its clients by means of an “on-marketplace” principal-client trade
(with specific client allocations conducted by journal entry). While the amendments to UMIR made
various aspects of the wide distribution rules of the TSX redundant (particularly those provisions that
capped “interference” from certain types of orders) other aspects, namely the provisions that provided
for the principal take-on trade to occur “off-marketplace” and the mechanism for the facilitation of
“distribution” of large blocks of stock, were not addressed. As such, the following guidance sets out
the expectations of IIROC with respect to the procedures for the execution of certain designated trades
that involve a Participant acting as principal. It is important to note that while the wide distribution
rules were applicable to the TSX, the procedures described in this Guidance Note are applicable for the
conduct of an unwinding trade on any Canadian marketplace.
Questions and Answers
The following are specific questions respecting the procedures for the execution of certain designated
trades by a Participant and the response of IIROC to each question:
1. With the elimination of the wide distribution rules of the TSX, is a Participant still able to
undertake, as principal, the “distribution” to its clients of a significant block of a listed
security?
• Yes. In certain circumstances, a Participant may agree to take on a significant block of
stock from a shareholder of a listed issuer at a discount to the prevailing market price
with the intention of immediately attempting to sell the stock to its clients.
The wide distribution procedures of the TSX were designed to facilitate the sale of a large block
of stock by a Participant to its clients in an efficient manner.10 IIROC is of the view that the
efficient distribution of large blocks of stock continues to be a laudable goal. As such, IIROC
may provide an exemption from Rule 6.4 of UMIR to allow a Participant to complete a principal
take-on trade “off-marketplace” if the trade is made in furtherance of a “distribution” to clients.
Unlike the wide distribution rules of the TSX, IIROC does not require a minimum volume or
value for a transaction to qualify for an “off-marketplace” exemption in accordance with Rule
6.4 of UMIR. In the view of IIROC, an “off-marketplace” exemption is warranted if the
Participant, acting as principal, assumes the “economic risk” of the transaction with the “intent
to distribute” the stock to its clients.
Under the wide distribution rules of the TSX, the practice developed that wide distributions
were generally undertaken at the close or the opening of trading. The introduction of the
10
Prior to their repeal, the wide distribution rules of the TSX required that a transaction meet several additional conditions, including:
•
timely public announcement of the wide distribution;
•
a minimum transaction value of at least $25,000,000;
•
distribution to 25 or more clients, with no one client’s allocation being more than 50% of the total allocation; and
•
completion of the wide distribution by the end of the fourth trading session following the announcement of the wide
distribution.
IIROC Notice 09-0224 – Rules Notice – Guidance Note – UMIR – Procedures for Handling Certain Designated Trades as Principal
4
amendments to UMIR regarding “designated trades” permits these types of distributions to be
undertaken at any time during the trading day on any marketplace.
2. What steps must a Participant take to facilitate an “off-marketplace” take-on trade in a
listed security in furtherance of a “distribution” to clients?
Before a Participant agrees to the “take-on” trade, the Participant must apply to IIROC in
writing for an exemption under Rule 6.4(b) of UMIR.11 In the normal course, IIROC will provide an exemption to allow the principal “take-on” leg of the “distribution” to be executed “off-
marketplace” if:
• the size of the “take-on” trade is such that the trade could not be completed on a
marketplace without being disruptive of the market;
• the price of the “take-on” trade varies from the intended price of the “distribution” (or
the highest price in a range of possible distribution prices if the price of the distribution
has not been finally determined) by an amount that is not more than the usual agency
commission that would be charged by that Participant to that client for an order of the
• the Participant intends to “distribute” the block of shares to its clients and does not
already hold client orders for a significant proportion of the block; and
• the Participant agrees that to the extent that the distribution price is more than the
greater of 5% or 10 trading increments lower than the prevailing market price at the
time the distribution trades are to be executed, the Participant will move the market in
accordance with the requirements set out in Part 2 of Policy 2.1 of UMIR to within 5% or
10 trading increments of the distribution price before executing the designated trade.
Any exemption granted by IIROC applies only to the transaction described in the application
for exemption.
11
For a general description of the procedures to be followed and the information to be provided in order to obtain an exemption pursuant
to Rule 6.4(b), see Market Integrity Notice 2005-020 – Guidance – Obtaining a Trading Exemption or Rule Interpretation (June 13, 2005).
In addition to the information set out in Market Integrity Notice 2005-020, a Participant seeking an exemption for an “off-marketplace”
trade related to a “distribution”, should submit to IIROC the following information:
•
the price at which the “take-on” trade will be executed (or the price range if the take-on price has not been determined);
•
the intended price of the “distribution” (or the highest price in a range of possible distribution prices if the price of the
distribution has not been determined);
•
a description of the “marketing efforts” that the Participant has undertaken;
•
the number of client accounts that have been solicited or which the Participant intends to solicit to purchase the securities;
•
the number and volume of solicited client orders the Participant holds at the time of the proposed “take-on” trade; and
•
the name of the counterparty to the “take-on” trade.
Counsel in Market Regulation Policy may be contacted by telephone or in writing as follows:
•
•
12
In essence, this condition ensures that the request for an exemption to execute the trade on a marketplace is not an attempt to avoid the
application of Rule 7.5 of UMIR dealing with recorded prices.
IIROC Notice 09-0224 – Rules Notice – Guidance Note – UMIR – Procedures for Handling Certain Designated Trades as Principal
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3. Are there any circumstances under which IIROC would not provide an “off-marketplace”
exemption to facilitate a “distribution” of a block of securities?
Yes. IIROC generally will not grant an “off-marketplace” exemption if, at the time of the
proposed take-on trade, the Participant already holds client orders for a significant proportion13 of the block. In these circumstances, IIROC believes that it is more appropriate for the
transaction to be completed “on-marketplace” with the Participant acting as agent for both
vendor and purchasers. However, it is acceptable for a Participant to have received “indications
of interest” from clients to participate in the distribution.
4. How is a Participant expected to execute the “unwinding” trade?
After the negotiation of the take-on trade, the Participant would market the “distribution” of
the block to its clients. The unwinding trade may be executed concurrent with or following the
completion of the take-on trade. Unless IIROC otherwise agrees, IIROC expects the unwinding
trade to be executed on a marketplace later that trading day. IIROC will permit the unwinding
trades to be recorded on a marketplace in a single principal-client trade for the entire block of
stock at the distribution price. The single trade will be permitted even in circumstances where
the Participant has not received client orders for the full amount of the block. After the
unwinding trade has been “printed”, the Participant may allocate the securities to clients by
means of journal entry for the balance of that trading day.14 5. What is a Participant expected to do if not all of the unwinding trade is allocated to
clients by the end of the trading day?
If a Participant has not allocated all the securities that were subject of the unwinding trade to
clients by the end of the trading day, IIROC expects that the Participant will take the
unallocated securities into its inventory account and file with IIROC a “Regulatory Marker
Correction Form” setting out, among other things, the number of securities marked as a trade
to a client which have been taken into inventory.15 To the extent that a Participant has taken
unallocated securities into inventory, any future sales of the securities must be completed “on-
13
The determination of what constitutes a “significant proportion” is a fact-specific analysis that takes into account various factors,
including, but not limited to, the liquidity profile of the security and recent trading patterns in the security. While IIROC retains sole
discretion in determining what constitutes a “significant proportion” for the purposes of Rule 6.4(b), IIROC will generally consider client
orders that account for more than 25% of the volume of the distribution to be a “significant proportion”.
14
For this purpose, IIROC considers the end of the “trading day” to be the close of trading on the last of the marketplaces on which the
security trades and which provides pre-trade transparency. In the context of designated trade distribution to clients, IIROC will also take
into account the liquidity and volatility profile of the particular securities when determining whether the “take-on” price satisfies this
requirement.
15
Reference should be made to IIROC Rules Notice 08-0033 – Guidance Note – New Procedures For Order Marker Corrections (July 15,
2008) for guidance on the procedures for reporting order marker corrections and the use of the web-based “Regulatory Marker
Correction Form” that is available on the IIROC website at www.iiroc.ca. Permitting the unwinding trade to be marked “principal- client” combined with the submission of a Regulatory Marker Correction Form via a secure web-based system to the extent that the
unwinding trade has not been fully allocated to clients, prevents information leakage on how much of the block of securities was taken
into inventory by the Participant.
IIROC Notice 09-0224 – Rules Notice – Guidance Note – UMIR – Procedures for Handling Certain Designated Trades as Principal
6
marketplace” as a principal trade that is subject to all of the provisions of UMIR, including Rule
5.2 (best price).
6. Is a Participant required to submit a report to IIROC once the distribution has been
completed?
Yes. After the “unwinding” trade has been fully allocated to clients or taken into inventory by
the Participant, the Participant must submit written confirmation to IIROC (at the e-mail
address provided in the confirmation of the grant of the exemption) setting out:
• the number of client accounts that received an allocation in the distribution;
• the largest percentage allocation to a single account; and
• the number of client accounts that were solicited to purchase securities covered by the
unwinding trade.
7. Is the unwinding trade subject to the “best price” obligation under Rule 5.2 of UMIR?
Yes. The execution of the unwinding trade is subject to the Participant making reasonable
efforts to trade with better-priced orders disclosed in a consolidated market display. In order to
limit interference from better-priced orders not included in the “disclosed volume” on the
marketplace on which the unwinding trade is to be executed, the Participant would mark the
unwinding trade with the “bypass order” marker. However, if the Participant had not “fully
allocated” the unwinding trade at the time of its execution, the Participant may wish to interact
with the undisclosed volume and Special Terms Orders in order to reduce the amount of stock
that the Participant might potentially have to take into inventory and, in these circumstances,
the Participant may decide not to mark the unwinding trade as a “bypass order”.
8. Is a Participant required to mark any orders entered on other marketplaces for
“displacement” purposes as “bypass”?
No, but IIROC recommends the use of the bypass marker on orders sent to displace better-
priced orders on other protected marketplaces to avoid interference from “undisclosed”
liquidity. For example, if a Participant sends an order to a protected marketplace16 to trade with the “disclosed volume” on that marketplace in compliance with the “best price” obligation
under Rule 5.2 of UMIR and does not mark the order “bypass”, the Participant takes on the risk
that the order will interact with the undisclosed volume, including hidden orders and the
undisclosed portion of iceberg orders and Special Terms Orders. To the extent that not all of
the orders included in the “disclosed volume” are filled, the Participant continues to have a
displacement obligation. For greater certainty, notwithstanding that a Participant enters an
order on a particular protected marketplace that is of a sufficient volume and is at price that will
16
Presently, the TSX, TSX Venture Exchange, CNSX, Pure, Alpha, Chi-X and Omega are considered to be a “protected marketplace”.
Reference is made to the definition of a “protected marketplace” in Rule 1.1 of UMIR.
IIROC Notice 09-0224 – Rules Notice – Guidance Note – UMIR – Procedures for Handling Certain Designated Trades as Principal
7
fill the disclosed volume, to the extent that the order is not marked “bypass” and the order
encounters “interference” from undisclosed orders on the marketplace, the Participant will not
have met its obligations under Rule 5.2
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