financial & operations compliance · quebec immigrant investor program and iiroc margin...
TRANSCRIPT
Financial & Operations ComplianceCurrent Trends & Issues
FAS Annual ConferenceSeptember 9, 2016
AGENDATrends:
• Early Warnings and Capital Deficiencies
• Number of Dealer Members by Peer Group
• Number of Dealer Members Reporting Monthly Losses
• Leverage Monitoring
• Risk Assessment Model
• Risk Trend Reports
2
TRENDSEarly Warnings and Capital Deficiencies
3
0
2000
4000
6000
8000
10000
12000
14000
16000
18000
0123456789101112131415161718
.
2008 2009 2010 2011 2012 2013 2014 2015 2016
TSX IndexFirms
Capital Deficiencies Early Warnings TSX Index
4
TRENDSNumber of Dealer Members by Peer Group
0153045607590
105120135150165180195210
2008
2009
2010
2011
2012
2013
2014
2015
Jun
2016
Num
ber
of F
irms
All DMs Retail Institutional (incl. ATSs) Integrated
5
TRENDSNumber of Dealer Members Reporting a Monthly Loss
$0$5,000$10,000$15,000$20,000$25,000$30,000$35,000$40,000$45,000$50,000$55,000$60,000$65,000$70,000
0
25
50
75
100
125
150
175
200
Jan-
14Fe
b-14
Mar
-14
Ap
r-14
May
-14
Jun-
14Ju
l-14
Aug
-14
Sep
-14
Oct
-14
Nov
-14
Dec
-14
Jan-
15Fe
b-15
Mar
-15
Ap
r-15
May
-15
Jun-
15Ju
l-15
Aug
-15
Sep
-15
Oct
-15
Nov
-15
Dec
-15
Jan-
16Fe
b-16
Mar
-16
Ap
r-16
May
-16
Jun-
16
$ A
mou
nt o
f Los
ses
[000
's]
Num
ber
of F
irms
Number of DMs incurring a loss during the month Total $ Amount of losses for mth
6
TRENDSLeverage Monitoring
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
Dec
-08
Mar
-09
Jun-
09
Sep
-09
Dec
-09
Mar
-10
Jun-
10
Sep
-10
Dec
-10
Mar
-11
Jun-
11
Sep
-11
Dec
-11
Mar
-12
Jun-
12
Sep
-12
Dec
-12
Mar
-13
Jun-
13
Sep
-13
Dec
-13
Mar
-14
Jun-
14
Sep
-14
Dec
-14
Mar
-15
Jun-
15
Sep
-15
Dec
-15
Mar
-16
Jun-
16
Leve
rage
Rat
io
Weighted Average Balance Sheet Leverage Ratios((Total Assets-RRSP-Free Credit Seg.) / (Capital + Subloans))
• Risk based approach• Objective is to identify firms with the highest probability of
incurring a capital deficiency• The business risk score has been updated to include Balance
Sheet Leverage and Outsourcing• The Risk Control Score has been updated to include
Outsourcing Management and Liquidity and Cash Management
• The Average Return on Assets has been eliminated from the Business Risk Score
• These changes became effective March 31, 2015
7
TRENDSRisk Assessment Model
• FINOPS, BCC and TCC risk models applied to all firms• RTRs issued to all firms once every 3 years• RTRS delivered annually to all firms rated high risk in any of
the 3 IIROC risk models • RTRs as at March 31, 2016 issued to dealer members rated
high June 29, 2016• Meetings scheduled with senior executives of firms to review
key risk attributes and engage in constructive discussion as to what the firm will do to reduce risk profile
• Number of high risk firms decreased from 2011 to 2016
8
TRENDSRisk Trend Report
AGENDAIssues:
• MFDA Members offering ETFs• Brexit Impact on DMs• Quebec Immigrant Investor Program and IIROC Margin
Requirements• Arrangements with US Commodity Brokers• Selling Group Allocations
9
• Securities Commissions now permit Mutual Fund dealers to sell exchange traded funds (ETF) no different than prospectus issued mutual funds
• MF dealers require access to TSX to sell ETF’s – may only set up an “omnibus trading account” with a dealer member to execute, settle and custody the positions on a non-fully disclosed basis – otherwise Rule 35 prohibits the arrangement
10
ISSUESMFDA Members Offering ETFs
ISSUESBrexit Impact on Dealer Members
• On June 23, 2016 the UK voted to leave the EU• Immediate drop in British Pound of 13%• On January 15, 2015 SNB abandoned its policy to cap the
Swiss franc at 1.20 to the euro• Swiss franc appreciated 30% quickly• Breixt was unlike the Swiss franc event and that could be risk
managed• Firms sent notices to clients well before the vote that margin
rates increased• IIROC conducted a sweep and found no significant losses,
no EW or CD• IIROC margin rates increase from 3% to 4 % in July 2016
11
ISSUESQuebec Immigrant Investor Program and IIROC Margin Requirements• DMs involved with Quebec Immigrant Investor Program• Eligible immigrants settle in Quebec and invest $800,000 for
five years• Changes to the program in 2015 requires $15,000 for each
application allocated but not filed• IIROC Rule 100.14 requires margin to be provided for any
contingent liability taken by a dealer member
12
ISSUESQuebec Immigrant Investor Program and IIROC Margin Requirements (Cont’d)
• The program allows applications to be transferred for a time• IIROC margin treatment
o allowed 30 days from the date the allocation is known to transfer files without capital penalty
o Past the 30 day period IIROC considers the allocation final and margin required
• IIROC amended margin treatmento 50% margin required for files not submitted one month
prior to transfer dateo 100% margin required for files not submitted after the
transfer date
13
ISSUESArrangements with US Commodity Brokers
• Most DMs who engage in futures and commodities trading have an omnibus arrangement
• Some DMs have arrangements with US FCMs whereby the customer is fully disclosed
• IIROC has revisited these arrangements to assess the risks and if they are introducing arrangements
• Cash and securities held by FCMs to satisfy margin requirements only are not considered to be maintaining custody of assets
14
ISSUESArrangements with US Commodity Brokers (Cont’d)
• Excess margin must be recalled daily from FCM• To address business continuity concerns DMs must continue
to obtain and maintain daily copies of all reports• To address outsourcing concerns DMs remain responsible
for all functions that are outsourced and should meet the requirements of Notice 14-0012 Outsourcing arrangements
15
ISSUESSelling Group Allocations
• A growing trend with some small DMs is to immediately sell into the market allocations of an underwriting as a selling group member
• Motivation to lock in the spread between draw down price for the new issue and the secondary trading market price
• May not be complying with principle of making a bona fide distribution to clients by shorting “non-pro eligible” new issue distributions
• Some DMs do not have the capital capacity (intra-day or overnight) on commitment date before offsetting with short sales into the market
• Lead underwriters not aware of this practice• Meeting with IIAC Investment Banking Committee to report
this activity to lead underwriting group16
CURRENT TRENDS & ISSUES
17
Questions