New rules for short sales

By Staff | March 6, 2012 | Last updated on March 6, 2012
2 min read

The Canadian Securities Administrators and the Investment Industry Regulatory Organization of Canada are seeking feedback from investors and market participants on appropriate disclosure and transparency measures related to short sales and failed trades in Canada.

The goal of the new rules is to curb abusive short selling practices. Among the reforms are the requirement that arrangements be made to borrow securities prior to a short sale in certain circumstances and the introduction of a new biweekly public report that will illustrate the level of short selling for each security.

“Effective disclosure and transparency practices are fundamental to maintaining fair and efficient capital markets,” said Bill Rice, chair of the CSA and chair and CEO of the Alberta Securities Commission. “A key consideration in our consultation will be striking the appropriate balance between enhancing trade transparency and maintaining a cost-efficient structure that encourages greater market participation.”

The two regulators have co-operated on a working group to monitor and review regulatory approaches used in other countries regarding short selling and failed trades.

The consultation period is open until May 31, 2012. Read the joint CSA/IIROC Notice.

IIROC has also announced it is repealing the “tick test” restrictions on the price at which a short sale may be made on Canadian equity marketplaces, effective September 1, 2012.

The move clears up a discrepancy in the Canadian market. While Canadian stocks were subject to the tick-test, there have been price restrictions on short sales for inter-listed securities since 2007. The exemption to the Canadian “tick-test” rules coincided with the removal of all short sale price restrictions in the United States.

IIROC has determined that the tick test has had no appreciable impact on price movement and IIROC currently employs other mechanisms, such as real-time alerts to detect and curtail abusive short selling practices.

“Together with enhancements to transparency and monitoring, these reforms contribute to fair and efficient regulation that supports both investor protection and competitive capital markets,” said Susan Wolburgh Jenah, IIROC’s president and CEO.

This regime includes a surveillance system which generates real-time alerts on trading activity across all Canadian marketplaces. Increased rates of short selling activity during periods of significant price declines generate an alert in the system

IIROC also has the power to vary or cancel any trade that is deemed “unreasonable”, halt the trading of any security across all Canadian marketplaces and to designate a security as short sale ineligible.

In February, IIROC implemented single stock circuit breakers as a tool to help mitigate volatility in the trading of certain securities. staff


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