The Investment Industry Association of Canada (IIAC) expressed its opposition to proposals from the Canadian Investment Regulatory Organization (CIRO) related to “Reasonable Expectation to Settle a Short Sale“.
The CIRO Proposals “do not appear needed in our continued low failed trade rate environment which has an adequate framework. The Proposals bring costs with unclear benefits,” the IIAC wrote in a comment letter.
IIAC detailed the following reasons:
I) Solving a Problem That Does Not Exist
Our member firms continue to observe a very low failed trade rate, whether with respect to short sales or otherwise, with most such failures to settle resulting from administrative reasons. Therefore, the Proposals appear an attempt to solve a problem that currently does not exist on the Canadian marketplace.
II) Adequacy of Current Framework
The existing Canadian regime is already equipped with a number of tools which can be used, if needed, to reduce the probability of settlement failures. For instance, CIRO could apply the Short Sale Ineligible Security and Pre-Borrow Security designations more frequently to address concerns about failed trades in specific sectors of the market or for specific issuers.
III) High Cost-to-Benefit Ratio
Imposing a positive obligation on Participants and Access Persons to demonstrate with conclusive evidence that there was a reasonable expectation to settle a short sale prior to order entry and to document such evidence creates a substantial new burden for IIAC member firms, without CIRO presenting clear evidence of pressing issues that could not be addressed under the existing regime. The burdens placed upon Participants and Access Persons with respect to their gatekeeper role is concerning particularly when it pertains to obtaining conclusive evidence of expectation to settle for direct market access clients. Such an imposition will increase execution times and/or require technological solutions which are not widely available in the Canadian marketplace, resulting in operational complexity and additional costs, without a demonstrable benefit to market integrity.