Financial & Operations Compliance Current Trends & Issues. FAS Annual Conference September 9, 2016

Transcription

1 Financial & Operations Compliance Current Trends & Issues FAS Annual Conference September 9, 2016

2 AGENDA Trends: 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

3 TRENDS Early Warnings and Capital Deficiencies Firms TSX Index Capital Deficiencies Early Warnings TSX Index 3

4 TRENDS Number of Dealer Members by Peer Group Number of Firms All DMs Retail Institutional (incl. ATSs) Integrated Jun

5 TRENDS Number of Dealer Members Reporting a Monthly Loss $70,000 $65,000 $60,000 $55,000 $50,000 $45,000 $40,000 $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $0 5 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Number of Firms $ Amount of Losses [000's] Number of DMs incurring a loss during the month Total $ Amount of losses for mth

6 TRENDS Leverage Monitoring 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 Leverage Ratio Dec-14 Jun-15 Sep-15 Mar-15 Dec-15 Mar-16 Jun-16 Weighted Average Balance Sheet Leverage Ratios ((Total Assets-RRSP-Free Credit Seg.) / (Capital + Subloans))

7 TRENDS Risk Assessment Model 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,

8 TRENDS Risk Trend Report 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

9 AGENDA Issues: 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

10 ISSUES MFDA Members Offering ETFs 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

11 ISSUES Brexit 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

12 ISSUES Quebec 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 requires margin to be provided for any contingent liability taken by a dealer member 12

13 ISSUES Quebec 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 treatment o 50% margin required for files not submitted one month prior to transfer date o 100% margin required for files not submitted after the transfer date 13

14 ISSUES Arrangements 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

15 ISSUES Arrangements 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 Outsourcing arrangements 15

16 ISSUES Selling 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 group 16

17 CURRENT TRENDS & ISSUES Questions 17