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The Evolution Of The Regulator’s Role

With Victoria Pinnington, Senior Vice-President, Market Regulation & Policy, Investment Industry Regulatory Organization of Canada (IIROC)
Victoria PrinningtonCapital markets have undergone significant and unprecedented change in recent years. As a result, regulators and market participants alike have been grappling with challenges and opportunities associated with a proliferation of new products and players, segmentation and fragmentation of markets and the sheer speed of trading across all asset classes.
This pace of change in our markets has made it imperative that IIROC, as the national self-regulator responsible for the oversight of all investment dealers and their trading activity in Canadian debt and equity securities, continues to evolve in its role and keep pace to ensure surveillance of the markets remains current and effective.
Analysis and consultation
IIROC plays a unique and central role in the Canadian regulatory framework based on our mandate to conduct surveillance of all Canadian equity markets, including exchanges and Alternative Trading Systems, both lit or dark, and all Canadian debt trading. We continually invest in and leverage technology to effectively monitor this fast-paced and quickly changing environment.
An important way to keep current about the markets we regulate is to study the regulatory data we receive to understand markets’ changing dynamics, emerging trends, participants and their activity. Another important way is encouraging discussion with the industry which gives us the opportunity to step back and examine the wider question of how our markets are evolving and consider the views and needs of diverse stakeholders.
An example is IIROC’s approach to addressing issues related to the growth of High Frequency Trading (HFT). IIROC commissioned and published five academic papers on HFT and its effect on Canadian markets, examining:

  • High frequency market making to large institutional trades
  • Role of HFT in market integration/market fragmentation
  • HFT within the context of both the impact of change to short selling rules and dark trading rules introduced in 2012
  • Liquidity provision and market making by HFT

To gain industry insights on our comprehensive study, IIROC co-hosted a public forum at which the academics discussed their findings and engaged in a robust dialogue with interested stakeholders.
While the results showed that there were no concerns that warranted regulatory action at this time beyond measures already implemented by IIROC, (the implementation of the Electronic Trading Rules, requirements for third-party electronic access to marketplaces and guidance on manipulative and deceptive practices), it demonstrates the importance of IIROC taking a data-driven and consultative approach.
Recognising the value of the data to a broader constituency, we are working to implement a data sharing strategy, so that data gathered and maintained as a public good is shared, with appropriate controls, with regulators and other industry stakeholders.
The importance of regulatory partnership
Another element to managing the challenges is collaborating with our regulatory partners. The more effective our partnership and coordination, the better we can carry out our shared responsibilities to protect markets and protect investors.
An example of this is our recent work with the Bank of Canada and the Canadian Securities Administrators (CSA) to improve the timeliness and comprehensiveness of regulatory oversight of Canada’s debt markets.
Trading in debt now dwarfs trading in equity, but although greatly important to Canada’s economic growth and financial stability, the debt market has been relatively opaque to regulators and investors.
We and our partners at the Bank of Canada and the CSA recognised that robust regulatory supervision and oversight of the debt markets are critical to enhancing market integrity and investor confidence. Last November, we began collecting information on all the debt security trades done by the dealers we regulate. As a result, IIROC is better positioned to monitor and enforce compliance with investor protection and market integrity rules in a cost-effective way, consistent with the equity market surveillance we already conduct across Canada.
The CSA is also working with IIROC to enhance dark market oversight and provide greater transparency to this growing and significant asset class. Under the CSA proposal currently out for comment, IIROC will become the transparency agent or “information processor” for the Canadian corporate debt market. In this role, IIROC will publicly disseminate trade information providing transparency that will facilitate more informed decision-making by all market participants.
The knowledge gained through our investments in IIROC’s surveillance, oversight and analytical work is especially important at a time when the environment is increasingly challenging securities regulators, the investment industry and all market participants.
Going forward, we’ll continue to use and share valuable data, count on insights from our stakeholders and collaborate with our regulatory partners as we manage the challenges and explore the opportunities that come with an evolving market structure.
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