Canada Mulls Audit Trail System


It is said that imitation is the sincerest form of flattery – and that might be the case in Canada as its leading regulator is considering building its own audit trail system.

That’s right, the beginnings of a Canadian CAT.

Doug Clark, ITG Canada

The Investment Industry Regulatory Organization of Canada (IIROC) has recently put forth a proposal which would require legal entity identifiers (LEIs) for orders so that the SRO (and other regional regulators) can better understand market structure and track participant behavior. The plan has been issued with a six-month comment period.

According to IIROC, the goal of including LEIs is to enhance market integrity and investor protection. The regulator has published for comment proposed amendments to the UMIR and the Dealer Member Rules (DMR) that would require client identifiers on:

  • each order sent to a marketplace
  • each reportable trade in a debt security. Dealer Members would need to provide client identifiers.

Doug Clark, head of market structure research at ITG Canada, told Traders Magazine that the idea of a audit trail isn’t something new up North despite the move towards LEIs.

“IIROC has had something close to CAT data, directly from the exchanges, for almost a decade, for secondary equity market trading,” Clark began. “They have used this for market surveillance and academic-style studies of market quality. Recently, they have proposed adding LEI’s (legal entity identifiers) to orders.”

Clark added that the inclusion of LEI’s is in line with IOSCO’s stated goals, and somewhat consistent with CAT and MIFID II. However, the question regarding all three audit trail plans (IIROC, CAT and MiFID II) is how this sensitive data will be safeguarded.

“And whether the three separate plans can work together to find some commonality so global broker-dealers do not have to build three unique solutions,” Clark said.

In order to better address the risks of increased usage of electronic trading tools, the IIROC proposed amendments would also require unique client identifiers for clients of a foreign dealer equivalent whose orders are entered under a routing arrangement and are automatically generated on a predetermined basis. In this case, the Participant would need to provide the:

  • LEI of the foreign dealer equivalent as the client identifier
  • unique identifier for the end-client whose orders are automatically generated on a predetermined basis.
  • orders entered under a routing arrangement (RA)
  • orders entered through an order-execution only service (OEO).

In light of the proposed designations above, the Proposed Amendments would remove the current identifier requirements for DEA, RA, and certain OEO clients, IIROC added.

Also, IIROC would like to see the development to back office systems to accommodate LEIs, systems development to include client identifiers on all order activity on marketplaces and systems development to include client identifiers on all reportable debt transactions.

Furthermore, IIROC wants firms to use a common encryption method and marketplace systems changes be able to pass-through client identifiers and account designations seamlessly.

IIROC requested comments on all aspects of the Proposed Amendments, including any matter that they do not specifically address should be filed and delivered by November 13, 2017.

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