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