CANADA: Proposed Amendments to TSX Rule Book

Tuesday April 11 2017

To further strengthen TSX`s market making system, TSX’s market making program is being expanded from a single Market Maker model to a dual Market Maker model whereby a TSX-listed security may have both a primary and secondary Market Maker assignment, each with specific market making obligations. Market Makers that have the primary assignment on a security will be referred to as the “Primary Market Maker” on that security and Market Makers that have the secondary assignment on a security will be referred to as the “Secondary Market Maker” on that security.

Under TSX’s proposal, the current security assignment process and performance evaluation criteria for primary assignments under the new dual model (i.e., existing assignments under the current program) will not be changed. The proposal introduces requirements and processes specific and applicable to secondary assignments that consist of market making obligations, a security assignment process, performance evaluation criteria, and administration and enforcement processes. These new secondary assignment features aim to provide clear, measurable and transparent expectations for Secondary Market Makers, and an appropriate alignment of security assignments and incentives with Market Maker performance.

It is TSX’s intention to have the Primary and Secondary Market Makers operate in parallel under their own set of obligations and processes for a period of time to allow for existing (Primary) Market Makers to become familiar with and adjust to the new requirements associated with Secondary assignments and for TSX to evaluate the effectiveness of the dual model and Secondary Market Maker requirements. After this transition period, TSX intends to continue with having two Market Makers (i.e., a dual model) but have both Primary and Secondary Market Makers follow a single set of requirements and processes based on the Secondary Market Maker processes and requirements. This transition period is expected to be approximately two years.

The Proposed Changes comprise the following amendments to support enhancements to the market making program:

1. Changes to allow more than one Market Maker to be assigned to a security, including:

• Introduction of a security assignment process to assign a Secondary Market Maker to a security,
• Introduction of specific performance obligations and evaluation criteria for Secondary Market Makers, and
• Changes to Market Maker functionality, including to the Minimum Guaranteed Fill (MGF) facility, Responsible Designated Trader (also referred to as “Registered Trader” or “RT”) participation, and the odd lot facility, to reflect the addition of a Secondary Market Maker.

2. Changes to the MGF facility, including:

• The execution of MGF trades will be at the protected National Best Bid and Offer1 (Protected NBBO) instead of at the TSX Best Bid and Offer (TSX BBO),
• Introduction of pre-qualified MGF-Eligible Trader IDs,
• Modification of the MGF eligibility criteria to reflect current routing practices, and
• Changes to the method for calculating the minimum size of the MGF.

3. A clarification to the policy regarding improper use of the odd lot facility.

4. Reorganizing the rule and policy framework so that operational details relating to the market making program, including specific performance criteria, obligations, administration practices and allocation and enforcement processes will be more precisely defined in publicly available documents on the TSX website rather than in the TSX Rule Book (the “TSX Rules”). Further, conforming and editorial amendments, including a reorganization of the market making rules, are being proposed to provide drafting clarity and to remove provisions that are no longer applicable or necessary in the TSX Rules.

Click on the link above for further details.