On December 8, 2022, the Canadian Securities Administrators (“CSA”) and the Investment Industry Regulatory Organization of Canada (“IIROC”) published Staff Notice 23-329 – Short Selling in Canada (the “Notice”). The purpose of the Notice is to provide an overview of the existing regulatory landscape surrounding “short selling,” as well as to give an update on current related initiatives and request public feedback on areas for regulatory consideration.
In the initial portions of the Notice, the CSA and IIROC reference the definition of “short selling” as defined in IIROC’s Universal Market Integrity Rules (“UMIR”) as “a sale of a security, other than a derivative instrument, which the seller does not own either directly or through an agent or trustee.” In addition, the Notice defines a “failed trade,” which although not defined in securities legislation, is defined in the Notice to mean a failure to deliver securities on the agreed upon settlement date. It should be noted that UMIR defines a “failed trade” as including a short sale by an account that has failed to make available the securities for settlement or has failed to make arrangements with the seller to borrow the securities in time to deliver on the settlement date.
The Notice then goes into detail regarding concerns and feedback that have been raised with respect to short selling and failed trades, including, but not limited to:
- the repeal of the “tick test,” which provided that a short sale not be made at a price which is less than the last sale price of the security;
- pre-borrow requirements for short selling (i.e., where a short seller enters a sale order without the intention to settle the resulting trades on a settlement date, and does so purely as a means to drive down the price of an issuer’s securities);
- concerns regarding the ten-trading day threshold for the reporting of failed trades under UMIR;
- concerns with respect to the transparency of short selling positions, and whether IIROC should adopt further reporting requirements regarding short selling activities, and whether specific reporting, transparency or other requirements should be considered for junior issuers; and
- whether Canadian securities regulators should adopt mandatory close-out or buy-in requirements in the event a short sale fails to settle, similar to those in the U.S. and the European Union.
The current regulatory regime in Canada with respect to short selling is governed by the provisions of the respective provincial securities legislation, as well as National Instrument 23-101 – Trading Rules. In Ontario, Section 126.1 of the Securities Act prohibits activities that (a) result in or contribute to a misleading appearance of trading activity in, or an artificial price for, a security, derivative or underlying interest of a derivative; or (b) perpetrate a fraud on any person or company.[1]
In addition to the foregoing, there are IIROC regulations and restrictions in place with respect to short selling, including, but not limited to: (i) a requirement to mark all orders representing a short sale as either “short” or “short-marking exempt;” (ii) a requirement to report “Extended Failed Trades” to IIROC; (iii) a requirement that, if an Extended Failed Trade report is filed with IIROC, further short sales generally cannot be made by a market participant without having made prior arrangements to borrow the securities necessary for settlement; (iv) the ability for IIROC to designate a security as a “Pre-Borrow Security;” and (v) the ability for IIROC to designate a security as a “Short Sale Ineligible Security.”
IIROC and the CSA are of the view that Canada’s regulatory regime governing short sales is generally consistent with the International Organization of Securities Commissions’ (IOSCO) four principles for the effective regulation of short selling. These four principles are that short selling should: (i) be subject to appropriate controls to reduce or minimize the potential risks that could affect the orderly and efficient functioning and stability of financial markets; (ii) be subject to a reporting regime that provides timely information to the market or to market authorities; (iii) be subject to an effective compliance and enforcement system; and (iv) allow appropriate exceptions for certain types of transactions for efficient market functioning and development.
The CSA and IIROC have set out a number of questions and topics for consideration by stakeholders, including, but not limited to:
- whether the existing regulatory regime around pre-borrowing in certain circumstances should be strengthened, and what requirements would be appropriate;
- whether the definition of a “failed trade” is sufficient, and if a timeline shorter than ten days following the expected settlement date should be considered for a failed trade;
- whether additional public transparency requirements of short selling activities or short positions should be considered; and
- whether mandatory close-out or buy-in requirements similar to those in the U.S. and the European Union would be beneficial for the Canadian capital markets.
The CSA and IIROC are seeking comments and or responses to the above questions on or before March 8, 2023. Comments should be addressed to:
The Secretary
Ontario Securities Commission
20 Queen Street West, 22nd floor, Toronto, Ontario M5H 3S8
[email protected]
If you have any questions, please reach out to a member of Miller Thomson’s Structured Finance and Securitization Group.
[1] Securities Act (Ontario) R.S.O. 1990, c. S.5.
