CIRO proposes close-out requirements for short selling

The Canadian Investment Regulatory Organization (CIRO) issued Proposed Amendments Respecting Mandatory Close-Out Requirements and is seeking comments to better understand whether these changes would be helpful and how stakeholders would be impacted.

In December 2022, CIRO and the Canadian Securities Administrators published Short Selling in Canada to request public feedback on Canada’s short selling regulatory framework. In response to comments received, CIRO and the CSA formed a staff working group to examine whether additional requirements relating to short selling would be appropriate in the context of the Canadian markets.

Mandatory close-outs would be triggered when there is a prolonged settlement failure at a clearing agency by an investment dealer. If persistent, settlement failures could pose significant risk to investors and erode confidence in the capital markets. The proposed requirements would mean that investment dealers, that are members of the clearing agency, would be required to “close” the fail-to-deliver position by buying or borrowing shares within specific timelines, or else they would become subject to pre-borrow requirements in the particular security.

“Stakeholder feedback on short selling in Canada shows divergent viewpoints and no consensus on the best approach,” said Kevin McCoy, senior vice president for Market Regulation at CIRO, in a statement. “The intent of publishing these Proposed Amendments for comment is to bring clarity to stakeholders on what the rules might look like, how they may apply to their businesses and to allow stakeholders to comment on those proposed changes specifically.”

CIRO has heard from some stakeholders that the regulator should explore implementing mandatory close-outs. The Final Report (published in January 2021) of the Ontario Capital Markets Modernization Taskforce recommended the modernization of Ontario’s short selling framework which includes the adoption of mandatory close-out provisions.

“A significant part of our mission to protect investors involves preserving the integrity of Canadian capital markets,” said McCoy in a statement. “With this proposal, we aim to strengthen our regulatory framework and harmonize our approach to potentially match those practices adopted in other jurisdictions where appropriate.”

Read the full proposal

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