Guidance on Trading Supervision Obligations

1 Rules Notice Guidance Note UMIR Please distribute internally to: Institutional Legal and Compliance Senior Management Trading Desk Retail Contact: Sanka Kasturiarachchi Policy Counsel, Market Regulation Policy Telephone: e-mail: 17-0190 September 28, 2017 Guidance on Trading Supervision Obligations Executive Summary This Guidance , which is effective on March 27, 2018, clarifies certain requirements under UMIR and Policy This Guidance repeals and replaces prior Guidance listed in section 3 of this Notice. In order to meet the requirements in UMIR Participants must develop, implement and maintain appropriate policies and procedures to prevent and detect violation of Requirements, taking into account the size, business model and affairs of the Participant.

2 The Guidance clarifies various requirements in UMIR and Policy and provides further detail as to how Participants can comply with these requirements. IIROC Notice 17-0190 Rule Notice Guidance Note - UMIR - Guidance on Trading Supervision Obligations Guidance Note - Table of Contents on Trading Supervision Obligations .. 2. Questions and Answers .. 8 is the difference between the roles of Supervision and Compliance? will compliance officers be subject to enforcement action by IIROC? policies and procedures are required under Part 10 of Policy regarding Audit Trail Requirements?

3 Is it important to retain order type information as part of the Audit Trail Requirements? .. policies and procedures are required under Part 3 of Policy regarding frontrunning? .. policies and procedures are required under Part 4 and Part 11 of Policy regarding Client Priority and Order Handling? .. policies and procedures are required under Part 5 of Policy regarding Manipulative and Deceptive Activities and Specific Unacceptable Activities? .. policies and procedures are required under Part 12 of Policy with respect to the Trading of securities on a Grey or Watch List?

4 Policies and procedures are required under Part 12 of Policy with respect to the review of Trading in Restricted Securities? .. on Existing Guidance .. IIROC Notice 17-0190 Rule Notice Guidance Note - UMIR - Guidance on Trading Supervision Obligations 1. Guidance on Trading Supervision Obligations This Notice clarifies IIROC s expectations on the application of UMIR and Policy Participants are reminded that failure to develop, implement and maintain written policies and procedures in accordance with UMIR and Policy may result in disciplinary action against the firm, its management, employees, and board of directors.

5 As part of each review by Trading Conduct Compliance, IIROC will review the policies and procedures developed by the Participant to determine if they are reasonably designed to: ensure compliance with applicable Requirements prevent and detect violations of the Requirements. IIROC will determine the reasonability of the policies and procedures by taking into account the size, nature of the business and the experience and training of the employees of the Participant. However, we note that Trading Conduct Compliance reviews do not constitute an approval of the policies and procedures or Supervision system by IIROC.

6 On an ongoing basis, the Participant s board of directors must ensure that the principal risks for non-compliance with the Requirements have been identified, and that appropriate Supervision and compliance procedures and systems to manage those risks have been implemented. Management of the Participant is responsible for ensuring that the Supervision system is appropriately designed and effectively carried out. Each Participant must ensure that its supervisory functions and compliance department are adequately funded, staffed and empowered to fulfill its responsibilities.

7 Inadequate funding of the compliance department or supervisory functions may be taken into account in the context of any disciplinary action. Part 1 of Policy requires a Participant to develop and implement a clearly defined set of policies and procedures that are reasonably designed to prevent and detect violations of Requirements . Participants are reminded that the term Requirements , as defined in UMIR , includes more than just UMIR and its Policies. Specifically, Requirements includes: UMIR and its Policies National Instrument 23-101 ( Trading Rules) rules, policies and other similar instruments adopted by a marketplace (Marketplace Rules) any direction, order or decision of the Market Regulator or a Market Integrity Official (Decisions) securities legislation.

8 IIROC Notice 17-0190 Rule Notice Guidance Note - UMIR - Guidance on Trading Supervision Obligations Policy sets out requirements for both supervisors and compliance departments and requires that a Supervision system include both Supervision policies and procedures and compliance policies and procedures. Policy uses a number of terms regarding Supervision systems that are not specifically defined in UMIR or the Policy. The following are IIROC s administrative interpretations for these various terms: Supervision system and supervisory system encompass the activities of both the Supervision procedures and the compliance procedures supervise , Supervision , supervisor , and supervisory refer to the responsibilities of the head of trading1 and each person who has authority or Supervision over or responsibility to the Participant for an employee of the Participant with respect to the Trading activities of the Participant as described in UMIR (4).

9 A Participant may have more than one head of Trading and any number of persons who have authority over the Trading activity of employees Supervision procedures are the policies and procedures to be followed by supervisors that are aimed at preventing violations from occurring compliance department and monitoring refer to the responsibilities of the persons responsible for the compliance activities of the Participant compliance procedures are the policies and procedures to be followed by the compliance department that are aimed at detecting whether violations have occurred management means those persons who are in supervisory roles, including those responsible for compliance department Supervision .

10 Elements of a Supervision System A Supervision system must include both compliance procedures aimed at detecting violations and Supervision procedures aimed at preventing violations. The ten elements of a Supervision system listed in Part 2 of Policy are primarily conceptual in nature and must be reflected in the overall structure of a Participant s policies and procedures. A Participant cannot simply list each of these elements in its policies and procedures or affirm that each is being done. When evaluating a Participant s policies and procedures, IIROC determines whether these elements have been appropriately considered and addressed.