Comments sought on short selling activities in Canada

On December 8, 2022, the Canadian Securities Administrators (“CSA”) and the Canadian Investment and Industry Regulatory Organization (“IIROC”) issued Staff Notice 23-329 – short sale in canada (Notice”). The purpose of this notice is to provide an overview of the existing regulatory environment surrounding “short selling”, provide an update on current relevant initiatives, and solicit public feedback on regulatory considerations. am.

In the first part of the Notice, CSA and IIROC changed the definition of “short sale” as defined in IIROC’s Universal Market Integrity Rules (“UMIR”) to “Sale of securities not owned directly by the seller or through an agent or trustee, other than derivative instrumentsIn addition, this notice defines a “failed transaction,” which is not defined in the Securities Act, but is defined to mean the failure to deliver a security on the agreed settlement date. UMIR shall define “failed trades” as short sales by accounts that have failed to make securities available for settlement or have failed to make arrangements with sellers to borrow securities in time for settlement. It should be noted that we have defined date.

The notice will then detail any concerns and feedback raised regarding the short sale and unsuccessful transaction. This includes but is not limited to:

  • Elimination of the “tick test,” which prohibits shorting a security below its final sale price.
  • advance borrowing requirements for short sales (i.e., when a short seller enters a sell order without intent to settle the resulting trade on value date and does so purely as a means of reducing the price of the issuer’s security);
  • Concerns about the 10 trading day threshold for reporting failed trades under UMIR.
  • Concerns about transparency of short positions and whether the IIROC should adopt additional reporting requirements for short selling activity and whether specific reporting, transparency or other requirements should be considered for junior issuers; and
  • Whether Canadian securities regulators, like those in the United States and the European Union, should adopt mandatory close-out or buy-in requirements when short sales are not settled.

Canada’s current regulatory regime for short selling is governed by the respective provincial securities laws and provisions of National Instrument 23-101 –. trading rulesIn Ontario, Section 126.1 securities law (a) prohibits trading activities in securities, derivatives, or the underlying interests of derivatives, or activities that create or contribute to an artificially misleading appearance of prices; or (b) commit fraudulent acts against any person or company;[1]

In addition to the above, IIROC regulations and restrictions apply with respect to short sales. This includes but is not limited to: exemptions;” (ii) the requirement to report “Expansion Failed Transactions” to IIROC. (iii) the requirement that, if an Extended Failed Trade Report is filed with his IIROC, a market participant generally cannot make further short sales without making prior arrangements to borrow the securities required for settlement; . (iv) IIROC may designate securities as “pre-borrowed securities”; (v) IIROC may designate securities as “short sale ineligible securities”;

The IIROC and CSA believe that Canada’s regulatory regime governing short selling is broadly consistent with the International Organization of Securities Commissions’ (IOSCO) Four Principles for Effective Regulation of Short Selling. These four principles are that short sellers should: (ii) be subject to a reporting system that provides timely information to the market or market authorities; (iii) be subject to effective compliance and enforcement systems; (iv) allowing appropriate exceptions to certain types of transactions for the purpose of efficient market functioning and development;

The CSA and IIROC have set out a number of questions and topics for stakeholder consideration, including:

  1. Whether existing regulatory regimes for pre-borrowing in certain circumstances should be strengthened, and what requirements are appropriate.
  2. Whether the definition of “failed transaction” is sufficient and whether timelines less than 10 days from the expected settlement date should be considered a failed transaction.
  3. Whether additional public transparency requirements for short selling activity or short positions should be considered.When
  4. Whether mandatory close-out or buy-in requirements similar to those in the United States and European Union would be beneficial to Canadian capital markets.

CSA and IIROC are requesting comments or responses to the above questions by March 8, 2023. Comments should be sent to:

The Secret Ontario Securities Commission 20 Queen Street West, 22nd floor, Toronto, Ontario M5H 3S8 [email protected]

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