January 23, Dear Ms. Solomon,

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1 Naomi Solomon, Senior Policy Counsel, Market Regulation Policy, Investment Industry Regulatory Organization of Canada, Suite King Street West, Toronto, Ontario, M5H 3T9 January 23, 2013 Re: IIROC Rules Notices Proposed provisions Respecting Third-Party Electronic Access to Marketplaces and Proposed Guidance Respecting Third-Party Electronic Access to Marketplaces. Dear Ms. Solomon, Scotia Capital Inc. (Scotiabank) appreciates the opportunity to comment on the above-noted Rules Notices. We are generally supportive of the framework governing third-party access to marketplaces introduced by the proposed amendments and guidance notice. We believe that for the most part they take a reasonable approach in replacing the current set of legacy exchange rules and regulatory notices that govern this area. We do however have a number of concerns with the proposals as they stand which are outlined in this letter. With respect to the DEA and Routing Arrangement regulations, they are mostly practical issues or clarifications that we are seeking. However we do have a more fundamental concern with the proposal to not allow Institutional clients of any kind to use Order Execution Services which we will address later in the letter. Comment on DEA and Routing Arrangements We are very supportive of the change from a prescriptive list of Eligible Clients who could access DEA services to a more principles and reasonable due diligence based approach. We also believe that the separation of DEA and Routing Arrangements allows for the specific characteristics of both arrangements to be addressed. Many of our comments on the proposed amendments apply to both types of arrangements so we will address them at the same time. We found it most productive to address the proposed amendments by UMIR section: Unique Client Identifier - UMIR 6.2 (1) a (iv,v) and We understand the desire to formalize the reporting of new DEA or Routing Arrangements (RA) and the assignment of unique client identifiers. This will ensure that IIROC has accurate client

2 identifiers before a client, investment dealer or foreign dealer equivalent starts trading. However, we have a number of concerns about how this may be implemented. We strongly support continuing to use the User ID Field to apply the client ID to every order. Introducing any new field that must be attached to every order would require a very large effort by Participants, exchanges and technology vendors without any real additional benefit. We are also concerned with how these IDs will be generated and assigned. We do not believe a situation where IIROC creates and assigns these IDs is workable for a number of reasons. - Currently trading IDs are often coded to identify a particular business stream or trading system as well as an individual trader or DEA client (eg SA12345 = System A, SB12345 = System B). This can allow for fast identification of the source of a problematic order, or to quickly identify and cancel all orders from a particular system. - One client may have multiple IDs assigned to them. For example they may have one ID assigned for their primary system and another assigned for their secondary or backup system. - It is not clear from a technical perspective if the same ID could be provided to different dealers for the same DEA client, but if this were possible we would be concerned about potential information leakage to market operators and technology vendors about a particular client s trading activity and relationships. - It would be very difficult and would likely cause multiple issues if all existing trading IDs had to be changed to meet a new ID convention. We would strongly suggest that dealers continue to create client IDs themselves and that they then be required to report to IIROC the specific IDs that will be applied to a new DEA client s orders. This would ensure that IIROC has an accurate list of DEA and RA clients while allowing the autonomy of assigning trading ID s to remain with each firm. Order Marking Expectations - UMIR 7.12 (2) c We are concerned that this amendment may imply that a higher standard of order marking is expected of DEA or RA orders than those that might be given to a traditional trading desk at the same Participant. In particular, we are concerned about Insider (IA) or Significant Shareholder (SS) markers. Currently, as per IIROC guidance, Participants are only required to mark an order for an institutional client as IA or SS if they are aware of a relationship between the client and the issuer and are not required to ask if one exists on each order. We would request clarification that: - DEA institutional clients only be required to mark IA or SS on their direct access orders if they would otherwise be required to do so on a regular phone order. - RA clients who are investment dealers or foreign dealer equivalents would be held to the same standard as a Participant and would have to ensure those markers are set only if they are aware that they apply for a particular client. We note that with foreign dealers, they do not typically know specific insider information for their clients and so would not generally be expected to apply these markers.

3 Use of Automated Order Systems UMIR 7.12 (2) e This section reads: standards must include a requirement that the investment dealer or foreign dealer equivalent: (e) take all reasonable steps to ensure that the use of automated order systems by itself or any investment dealer or foreign dealer equivalent, does not interfere with fair and orderly markets. We believe this language should likely mirror section (f) the investment dealer, foreign dealer equivalent or any client Otherwise we would seek clarification on who the any investment dealer or foreign dealer equivalent refers to in (e). Automated Order System Testing - UMIR 7.12, 7.13 (2) f We are concerned that the requirement for DEA and RA clients to ensure that their automated trading systems, and those of their clients, are tested in accordance with prudent business practices is likely too high a standard. A more reasonable standard would be that they be required to maintain policies and procedures reasonably designed to ensure appropriate testing. We are concerned that, in particular, foreign dealer equivalents may not be comfortable signing contracts that require they ensure their clients have adequately tested since they do not directly control those systems. Written Routing Agreements 7.12, 7.13 (3) a Again here we feel that the requirement that written agreements stipulate that DEA and RA client orders, and those of their clients, will comply with all Requirements is not a reasonable standard. We would seek that they be required to maintain policies and procedures reasonably designed to ensure orders comply with the Requirements. Vary or Correct Orders , 7.13 (3) d We do not believe that a Participant requires the ability to vary or correct client orders and we are unsure when, if ever, this would be used. This requirement is also part of the existing TMX direct access rules and it has always caused issues when establishing contracts with clients. We understand our clients concern since the current drafting implies that we could change any detail of an order (price, size, even symbol) and they would be required to take any resulting fills. We understand that this is not the intent, but we cannot think of a situation when we would amend a client order without their instructions, instead of cancelling the order outright. We believe that with the ability to reject or cancel any order and to discontinue accepting orders, that we have the necessary ability to manage our client s trading. If there are specific scenarios or

4 order details that IIROC is concerned about, then we would suggest limiting this ability to those specific cases, otherwise we would prefer to see the requirement removed altogether. Annual Client Review UMIR 7.12 (5) b We would seek clarification that an annual confirmation and sign-off by clients would meet the requirement to confirm continued client compliance with the agreement and standards. We would also ask that Participants be permitted to define an annual review date in their policies and confirm client compliance before that date rather than the effective date of each individual agreement. This would allow us to coordinate such reviews as part of an annual process, significantly improving efficiency, without compromising effectiveness. Providing Client Contact Information to IIROC and 7.13 (6) We have significant concerns about the requirement to provide DEA and RA client contact information to IIROC so that they can deal with the client directly to get more information immediately following entry of an order. We feel that this will result in significant confusion and concern among our clients and do not believe it will result in more efficient information collection by IIROC. Our concerns include: - This will result in confusion over who is regulated directly by IIROC. An IIROC representative calling a client directly may give the false impression that the client has become a regulated entity. - The Participant providing access is responsible for these orders from a UMIR perspective. Calling the client directly denies the Participant the ability to respond directly to IIROC questions and may result in them not even being aware of a regulatory concern with a particular order or client. - There are existing channels for IIROC to inquire on any concerns. The Participant should be able to relay any questions and respond on behalf of a client. - Many international clients (particularly in the U.S.) will refer any regulatory inquiry to their compliance department. This has the potential to delay answers on questions versus having the Participant trading desk relay these questions. - It is also possible that clients may refuse to respond to questions from a regulator who does not directly regulate them. In this case it is up to the Participant to provide an acceptable response to IIROC and take any necessary action to control orders from the client in question. In the event that IIROC requires further information from the end client, the appropriate process would be for IIROC to request that information from the client s local regulator, who has direct oversight, using established channels for such requests. Our concern here is not one of limiting IIROC s access to information, but rather ensuring that the right channels are employed. We are very concerned that the current proposal will both

5 exclude the responsible Participant from discussions and cause significant confusion among clients. If IIROC believes that this direct to clients access is necessary, we would seek clarification on what type of questions they would anticipate asking directly of DEA and RA clients and what information, if any, clients would be required to provide from a regulatory perspective. We would also seek clarification on why IIROC intends to require Participants to provide the names of individuals at DEA clients who are authorized to enter orders. This is clearly information that the Participant needs to have and maintain however it is not clear what IIROC would intend to do with this information and whether the benefit would justify the effort involved for Participants and IIROC to share and maintain these lists. Comments on Order Execution Only Services Scotia provides both institutional and retail services and as such is also impacted by proposed amendments to Order Execution Service regulations. Our retail area has raised the following concerns with the proposed amendments as they relate to OES accounts. Prohibition on Institutional Customers using OES Clarification is requested with respect to the requirement that Order Execution only services be provided only to retail customers. There does not appear to be any guidance as to the reasoning for this requirement. If the reason is to prevent having institutional customers that may be using an automated order entry system from using the Order Execution only service, and therefore avoiding the supervision entailed with this type of order entry, this should be satisfied by the requirement that Order Execution only customers not be allowed to use such automated order entry systems unless provided by the Order Execution only provider. If there is another rationale for the amendment then we would ask for clarification on that reasoning since in many respects we believe that an OES account may provide more rigorous oversight than an institutional account opened for a relatively small client. We also believe that the part of the definition of an Institutional customer that encompasses a non-individual with total securities under administration or management exceeding $10 million may capture certain customers for which the spirit of the rules is not intended. There are a number of instances of non-individual accounts having an excess of $10 million that are otherwise managed by one or several individuals as personal holding or investment corporations, or trust accounts. The requirement that these accounts must be transferred away from the Order Execution only provider is without apparent guidance and we believe in many cases these accounts may be better served by an Order Execution Service without any increased regulatory risk. If IIROC does believe that OES should not be able to service institutional accounts we would ask that you consider an exemption for this category of account.

6 On a final note, we would point out that for many institutional clients using OES providers, the comparable institutional offerings may not prove economic since there are typically higher fixed trading system and market data charges that must be covered in an institutional trading relationship, which may be prohibitive for a client who only just exceeds the $10mm threshold. Annual Confirmation of Non-use of Automated Order Entry The requirement that Order Execution only customers must confirm annually with all of their customers that they are not using an order entry system requires clarification, and in any event appears onerous on the industry. The requirement does not state whether a positive response (where the customer must reply back) is required from every customer and, if so, if no response is received what the course of action must be taken with the customer s future trading capabilities. We believe that requiring that a communication go out to all Order Execution customers that requires a positive response will be onerous given the customer base in such services can easily exceed 500,000 customers and more for some of the members. While many of these customers actively use online facilities to do their trading, and it could be envisioned that an electronic communication be used with them, a significant number do not actively trade electronically. This would require that a paper form of response be received back. We do not believe that Order Execution only providers should be required to confirm with all of their customers that they are not using an automated order entry system. We do believe that they should confirm this with all of their Institutional customers, as well as with any customers they may believe is using such a system based on ongoing monitoring. Ongoing Monitoring for use of Automated Order Entry The requirement to monitor on an ongoing basis to determine customer orders are not generated from an automatic order system requires further clarification. There does not appear to be any detailed guidance with respect to what might suggest this type of activity. During the information session held in Toronto on Nov 13, 2012, there was a suggestion that the volume and timing of trading activity may suggest the possibility of an automated order entry system being used, but there is no other clear guidance regarding this. Order Thresholds The requirement that Order Execution providers not allow customers to manually send orders or generate orders to the Dealer Member that exceed the threshold on the number of orders set by IIROC from time to time requires clarification. There was no reasoning provided for the thresholds requirement, no implementation or communication method explained, and no method as to how the thresholds will be determined. We believe that clarifying this will allow the Order Execution only service providers sufficient time to determine how and if they can implement such trading thresholds within their current trading environments.

7 Responses to Specific Questions 1. Are there any consequences from the proposed extension of the definition of Participant to include an investment dealer in a routing arrangement that is authorized to perform on behalf of the Participant the setting or adjustment of a specific risk management or supervisory control, policy or procedures and that investment dealer: engages in trading on behalf of accounts in which the investment dealer has a direct or indirect interest in addition to that of its clients; or direct orders to a marketplace without passing through the systems of a Participant that have not been addressed in the Proposed UMIR Amendments? In the alternative, should routing arrangements simply prohibit: Response: a Participant from authorizing an investment dealer engaged in proprietary trading to perform on behalf of the Participant the setting or adjustment of a specific risk management or supervisory control, policy or procedure; and the ability of an investment dealer to transmit orders to a marketplace without first passing through the systems of a Participant? We believe the appropriate response may be a hybrid of the two proposals. We do not believe that any client should be able to route directly to a marketplace without passing through the systems of a Participant, so we would support a clear prohibition on that activity. For clients who engage in proprietary trading but are authorized to set risk management or supervisory controls for access by their clients, we would propose that they be able to become both a DEA and RA client of the Participant. The client would be required to use the DEA relationship for any proprietary trading and the Participant would retain control over the risk controls for that access. 2. Are the risks of providing direct electronic access to a client sufficiently different from the risks associated with operating a routing arrangement with an investment dealer to justify a separate rule governing each means of electronically accessing a marketplace? Response: We believe that though many of the risks are very similar for the two types of access, there are some distinct risks for RA clients that need to be dealt with. We view whether these are addressed in the same rule or as part of separate but similar rules (as is proposed) as mainly a drafting and stylistic question and are fine with either approach.

8 3. Are there any implementation issues respecting the regulatory framework for electronic access to marketplaces that have not been considered? Response: We would seek clarification on the treatment of clients with direct access to dealer algorithms with respect to DEA and RA regulations. There appears to be some confusion on whether a client accessing a dealer s algorithms directly (where the order is received, validated and executed by the system without direct human intervention) must be considered a DEA, RA or OES client, or if those orders would be considered to have been intermediated by the Participant. Our reading of the regulations as proposed leads us to conclude that they should be included as DEA, RA or OES access since they have not been received, processed and entered on the marketplace by an employee of the Participant (proposed UMIR 6.1(7)a) but we would appreciate IIROC providing their interpretation to ensure consistent practices across the industry. 4. Is the contemplated timeframe for implementation sufficient? Response: We believe that the implementation time for the proposed amendments is likely reasonable. Amending or replacing existing contracts with DEA and RA clients will be a long and time consuming task but a year is likely sufficient time to achieve this. If IIROC follows through on requiring OES providers to stop servicing any institutional clients we would suggest that a similar 180 day extension may be required beyond the initial 180 days to fully effect this migration. We have not completed our analysis of the work required to identify and move those clients, but we anticipate this to be a very onerous and time consuming task. As always, we appreciate the opportunity to respond to the proposed amendments and guidance, and would be pleased to discuss any of our comments or provide more information. Yours Sincerely, Evan Young Managing Director, Head of Electronic Execution Services Global Equity, Global Banking and Markets Scotia Capital Inc. (416) evan.young@scotiabank.com