New Market Regulation Fee Model

Transcription

1 Administrative Notice Request for Comments Please distribute internally to: Senior Management Finance Contact: Keith Persaud Senior Vice President, Finance and Administration November 30, 2010 New Market Regulation Fee Model Executive Summary IIROC s Recognition Order requires that an integrated fee model be developed and submitted to the Canadian Securities Administrators ( CSA ) for approval. IIROC issued a Request for Comments regarding a proposed Dealer Regulation fee model in April 2010 (IIROC Notice ). IIROC established an industry committee, representing a cross-section of IIROC Marketplace and Dealer Members, to provide input and advice on the development of guiding principles for a new market regulation fee model, and the identification and evaluation of alternative fee models. The industry committee adopted the same guiding principles as were used for the Dealer Regulation fee model review: fairness, transparency, industry competitiveness and cost recovery. IIROC staff identified cost drivers to help determine the regulatory costs consumed by Marketplace Members.

2 IIROC staff reviewed the market regulation fee models of similar regulatory organizations to ensure that best practices were considered and incorporated, as appropriate. IIROC staff and the industry committee considered a number of alternative fee models, including IIROC s current market regulation fee model. IIROC recommends, and the industry committee endorses, a market regulation fee model that is based on messages and the number of trades as the cost drivers for recovery of market regulation costs. The recommended model was presented to both the Finance & Audit Committee and IIROC Board on November 17, 2010 where it was approved for publication for comment. Overview of the New Market Regulation Fee Model Development Project Background Currently, IIROC operates two separate fee models (using a cost allocation model to allocate indirect costs) to recover costs for Dealer and Market Regulation activities. The two models were those in place at the IDA and RS, respectively, at the time of the merger. The Terms and Conditions of IIROC s Recognition Order dated June 1, 2008 require that 1 : IIROC develop an integrated fee model and submit it for approval with the Commission / CSA within two, subsequently extended to three years of the date of the recognition order. IIROC must report in writing on a quarterly basis for the first two, subsequently extended to three, years of operations on the status of the development of the fee model. The Recognition Order further stipulates that 2 : All fees imposed by IIROC must be equitably allocated. Fees must not have the effect of creating an unreasonable barrier to access. The process for setting fees must be fair and transparent. IIROC must operate on a cost-recovery basis. 1 OSC Recognition Order dated May 16, 2008, Appendix A, section 4. 2 OSC Recognition Order dated May 16, 2008, Schedule 1, part 4. IIROC Notice Administrative Notice Request for Comment New Market Regulation Fee Model 2

3 The term integrated fee model was not defined in the Recognition Order. IIROC s approach is as follows: there are two pools of costs comprising unique direct costs as between Dealer and Market Regulation (e.g., registration costs are an example of a Dealer Regulation cost; and market surveillance costs are an example of Market Regulation costs). Also included in these two cost pools, allocated on an appropriate basis, are shared indirect costs (e.g., Finance). The resulting two cost pools would then be recovered from Dealer Members and Marketplace Members on the basis of certain cost drivers described below. Analysis to Date of the Dealer Regulation Fee Model IIROC established an industry committee, representing a diverse cross-section of the Dealer membership, to help facilitate development of a new Dealer Regulation fee model. The committee developed the following guiding principles to help evaluate potential alternative fee models: fairness, transparency, industry competitiveness and cost recovery. IIROC staff identified regulatory cost drivers to help determine the regulatory costs consumed by Dealer Members. IIROC staff also reviewed the dealer regulation fee models of similar regulatory organizations to ensure that best practices were considered and incorporated, as appropriate. The committee recommended adoption of an alternative based on the current Dealer Regulation fee model, but with rates that vary by a Dealer Member s revenue including a minor risk based element. IIROC published the recommended model for comment on April 28, 2010 (IIROC Notice ). Prior Analysis of the Market Regulation Fee Model Beginning in April of 2006, RS undertook a detailed review of RS s fee model for market regulation. In January 2007, RS published RS Notice (Proposed UMIR Regulation Fee Model) to solicit public comments on the 2007 proposal. The 2007 proposal would have used functional areas within RS as discrete cost centres. For each of these functional areas, RS would have applied specific cost drivers, based on its analysis of the regulatory activities performed by personnel in each area. In response to comments received on the 2007 proposal, RS developed a modified proposal in 2008 that had three elements: a $2,000 minimum monthly fee for each marketplace; a variable fee charged to each marketplace based on that marketplace s share of the total number of messages processed by RS s surveillance system during the month RS proposed to recover the IT costs of its surveillance systems through this variable fee; and a variable fee charged to each marketplace based on that marketplace s share of the IIROC Notice Administrative Notice Request for Comment New Market Regulation Fee Model 3

4 total number of trades and orders during the month; RS proposed to recover all other regulation costs through this variable fee. A fourth component of the 2008 proposal was that RS proposed to bill only marketplaces for market regulation fees, and to discontinue Dealer Member billing on behalf of marketplaces. The 2008 proposal was presented to the recognizing regulators for their review and comment, but never published for comment as the RS-IDA merger, and IIROC s undertaking to develop an integrated fee model, superseded that proposal. Industry Committee In order to ensure that member input was considered in the development of a new Market Regulation fee model, IIROC established an industry committee (the Committee ). A request for nominees was sent to all marketplaces regulated by IIROC and all Dealer Members who trade on these marketplaces. Membership of the Committee was struck so as to reflect IIROC s Marketplace and Dealer membership generally. The primary responsibilities of the Committee were to provide input and advice on: development of guiding principles for a new market regulation fee model; identification and evaluation of alternative fee models; and recommendation of a new fee model for submission and approval. The members of the Committee were: Ken Baker, CIBC World Markets Marc Bouchard, Toll Cross Securities Rob Cook, CNSX Greg Davies, ITG Canada Corp Frank DiLiso, TMX Group Francois Gervais, Penson Canada Ken Klepacki / Sonia Pedersen, Chi-X John MacPhail, Union Securities John Mitchell, Salman Partners Inc. Bob O Leary, TD Securities Gerry Throop / Albert Kovacs, National Bank Financial Nick Tomovski, RBC Dominion Securities Robert Young, Liquidnet Canada Stephen Zamin, Alpha ATS IIROC Notice Administrative Notice Request for Comment New Market Regulation Fee Model 4

5 Industry Benchmarking In order to help ensure that best practice elements were incorporated into the development of a new fee model, IIROC staff reviewed the market regulation fee models of the Financial Industry Regulatory Authority ( FINRA ), the CME Group, the New York Stock Exchange ( NYSE ), and the Bourse de Montreal ( MX ). FINRA performs market regulation under contract for The NASDAQ Stock Market, the American Stock Exchange, the International Securities Exchange, the Chicago Climate Exchange and the NYSE. The CME Group (consisting of CME, CBOT, NYMEX and COMEX) is a derivatives marketplace. CME Group s CME and CBOT subsidiaries are self-regulatory organizations responsible for ensuring the integrity of trading in CME Group products, and also provide regulation services to exchanges outside the CME Group. The NYSE outsourced market regulation to FINRA in June The MX provides market regulation for certain exchange-traded derivatives in Canada. There is no common or consensus approach among these regulators. Instead, these organizations use one or more of the following methods to allocate costs among multiple markets: an hourly rate for staff time; staff time as a proxy for consumption of non-personnel regulatory resources; activity-based measures; and additional levies for capital expenditure funds and profit margins. New Fee Model Guiding Principles The industry committee adopted the following guiding principles as an objective frame of reference with which to evaluate the current fee model as well as potential fee model alternatives: Fairness: A Dealer Member s or Marketplace Member s share of fees should be based on its usage or consumption of IIROC s regulatory services. Transparency: o Dealer Members and Marketplace Members should understand how their fees reflect the application of the guiding principles. o Rules and principles that determine fees should be consistently applied to all Dealer Members and Marketplace Members. IIROC Notice Administrative Notice Request for Comment New Market Regulation Fee Model 5

6 o To the extent possible, Dealer Members and Market Members should be able to reconcile billing drivers used in an invoice to information that they supplied to IIROC. Industry Competitiveness o In the public interest, and to the greatest extent possible, fees should not inhibit new entrants. o The setting of fees should be designed to be as neutral as possible so as not to favour one marketplace over another or influence decisions where to trade. Cost Recovery of Regulatory Services Provided: IIROC will operate on a cost recovery basis. Market Regulation Cost Drivers IIROC s direct Market Regulation costs arise from the Market Surveillance, Trading Review & Analysis ( TR&A ), Trading Conduct and Compliance ( TCC ), Enforcement and IT departments. IIROC staff reviewed the activities carried out by these departments to determine their cost drivers. These cost drivers were used to determine the value of IIROC s resources consumed by each Marketplace Member. Department Market Surveillance TR&A TCC Enforcement Surveillance IT Cost Drivers Number of trades Number of cases reviewed (triggered by trades, influenced by orders) Number of trade desk reviews performed (resources expended on reviews impacted by trades) Number of files assessed, investigated, prosecuted, and closed (triggered by trades, influenced by orders) Volume of messages (orders and trades) to be processed by the market surveillance systems IIROC Notice Administrative Notice Request for Comment New Market Regulation Fee Model 6

7 Department Indirect Cost Departments Cost Drivers Allocated based on the cost allocation model Fee Model Alternatives Considered Current Market Regulation Fee Model The principal elements of the current Market Regulation fee model are as follows: It operates on a cost recovery basis where all Market Regulation costs are fully covered by revenues annually. The amount to be recovered through Market Regulation fees is based on budgeted costs determined in advance for the year less interest income and timely disclosure fees. IIROC collects the Market Regulation fee from Dealer Members in respect of their trading activity on marketplaces. 3 IIROC charges a fixed annual Market Regulation fee of $5,000 to each Dealer Member. To calculate the monthly Market Regulation fee, IIROC takes its costs for that month less the monthly fixed annual fee and charges each Dealer Member its net pro rata share of that amount based on the portion of total trading volume (i.e. shares traded) that was conducted by that Dealer Member during the month. 4 If a marketplace has unique features that require IIROC to perform additional work to monitor that marketplace, IIROC recovers such Marketplace-Specific Costs directly from that marketplace. For example, Marketplace-Specific Costs arise where a marketplace has unique markers, or a unique trading session that requires modifications to IIROC s systems or procedures or staffing to accommodate. Another example of a Marketplace- Specific cost occurs as a result of a failure to meet an IIROC regulatory feed standard, testing window or project deadline that results in IIROC incurring additional costs. 3 The only exception is Liquidnet, which does not have Dealer Members as subscribers and so is billed directly. 4 This calculation is subject to a volume cap on each trade of 30,000 shares. In addition, 70% of the volume of trades pursuant to market maker obligations is excluded from a Dealer Member s volume and the overall adjusted volume of IIROCregulated marketplaces for the purposes of calculating the Market Regulation Fee. The volume on the other side of any trade involving a market maker is included in the calculation of overall volume. IIROC Notice Administrative Notice Request for Comment New Market Regulation Fee Model 7

8 Discussion of Current Model and Guiding Principles The current model is transparent as it is consistently applied to all Dealer Members with disclosure of trading volumes provided to each Dealer Member. The current fee model favours the guiding principle of fostering industry competitiveness, since the Market Regulation fee is uniform across all marketplaces on a cost-per-share traded basis. Since the amount charged to each Dealer Member is based on that entity s share of total shares traded, newer marketplaces with low volumes of shares traded incur low Market Regulation fees. The cost recovery guiding principle is met as all Market Regulation costs are recovered. The current model is not, however, fair because it uses shares traded volume as the sole driver, ignoring the significant evolution of trading activity in relation to messages, including orders and order-to-trade ratios. As new marketplaces launch with highly differentiated trading models (e.g., new marketplaces with much higher order-to-trade ratios than average), the appropriateness of shares traded as the sole driver to track IIROC s costs of providing Market Regulation is questionable. Key Market Statistics In order to analyse the impact of any alternative to the current model, IIROC collected information on cost drivers and other measures by marketplace over three time periods shown in the table below 5 : 5 The table presents data for three periods: the one-year period April 2008 to March 2009, the one-year period April 2009 to March 2010, and the six-month period October 2009 to March Data for the final six-month period is presented to reflect recent trends in market share among marketplaces. IIROC Notice Administrative Notice Request for Comment New Market Regulation Fee Model 8

9 Marketplace Messages Orders Trades Shares Traded Apr/08 - Mar/09 A 72.83% 72.30% 92.25% 73.74% Apr/09 - Mar/ % 55.39% 69.55% 56.92% Oct/09 - Mar/ % 54.92% 61.44% 48.96% Apr/08 - Mar/09 B 0.35% 0.30% 2.37% 23.24% Apr/09 - Mar/ % 0.40% 2.50% 23.44% Oct/09 - Mar/ % 0.42% 2.81% 25.34% Apr/08 - Mar/09 C 0.67% 0.68% 0.29% 0.53% Apr/09 - Mar/ % 13.49% 13.90% 13.70% Oct/09 - Mar/ % 17.84% 20.31% 19.08% Apr/08 - Mar/09 D 17.68% 18.07% 2.99% 0.73% Apr/09 - Mar/ % 25.31% 11.60% 3.71% Oct/09 - Mar/ % 21.32% 13.08% 4.32% Apr/08 - Mar/09 E 7.07% 7.23% 1.10% 1.03% Apr/09 - Mar/ % 5.21% 0.91% 1.16% Oct/09 - Mar/ % 5.27% 0.80% 1.14% Apr/08 - Mar/09 F 0.13% 0.12% 0.89% 0.47% Apr/09 - Mar/ % 0.15% 1.40% 0.79% Oct/09 - Mar/ % 0.15% 1.37% 0.79% Apr/08 - Mar/09 G 1.28% 1.31% 0.10% 0.09% Apr/09 - Mar/ % 0.05% 0.13% 0.11% Oct/09 - Mar/ % 0.06% 0.17% 0.15% Apr/08 - Mar/09 H 0.00% 0.00% 0.01% 0.13% Apr/09 - Mar/ % 0.00% 0.01% 0.14% Oct/09 - Mar/ % 0.00% 0.01% 0.19% Apr/08 - Mar/09 I 0.00% 0.00% 0.00% 0.03% Apr/09 - Mar/ % 0.00% 0.00% 0.03% Oct/09 - Mar/ % 0.00% 0.00% 0.03% Marketplaces differ significantly in terms of their percentage share of messages, orders, trades and shares traded. For example, while marketplace C shows a relatively consistent share of messages, orders, trades, and shares traded (particularly for the most recent period), marketplace B shows a considerable imbalance in favour of shares traded, while marketplace D shows a considerable imbalance in favour of messages, orders and trades. Since messages and trades are the primary drivers of market regulation costs, this means that Marketplace B is overpaying for market regulation under the current model (which is based solely on shares traded), while marketplace D is underpaying for market regulation costs under the current model. IIROC Notice Administrative Notice Request for Comment New Market Regulation Fee Model 9

10 Proposed Alternative Market Regulation Fee Model Messages and Trades The proposed alternative will structure Market Regulation fees as follows: a minimum monthly fee of $4,800 per Marketplace Member; a fee charged to each marketplace based on that marketplace s share of the total number of messages processed by IIROC s surveillance system during the month this component recovers the IT costs of the surveillance system; a fee charged to each marketplace based on that marketplace s share of the total number of trades during the month this component recovers all other regulation costs; and IIROC will continue to recover Marketplace-Specific Costs directly from the marketplace that incurs such costs. The proposed model is based on the following analysis: the minimum monthly fee was determined by combining (a) the minimum effort of approximately 25 hours per month for market regulation activities per month, multiplied by a fully-loaded hourly rate for the personnel resources required; and (b) third-party IT costs for hosting and connectivity; messages are a primary driver of surveillance IT costs as the number of messages received, processed, analyzed and stored are directly proportionate to the cost of surveillance IT resources consumed; IIROC s analysis has shown that the number of trades is the primary driver of staff effort in all direct market regulation departments; while orders affect the costs of some direct market regulation departments (such as Enforcement and TR&A), they are a secondary cost driver of overall market regulation costs and require IT resources to assist with analytical reports; and IIROC believes that it is appropriate for each marketplace to bear its Marketplace- Specific Costs directly, since these costs are caused directly by the unique features of the marketplace and should therefore be recovered directly from that marketplace. The minimum fee represents a means to recover the costs IIROC incurs to monitor trading on a marketplace that is independent of the level of trading that actually takes place on the marketplace. IIROC Notice Administrative Notice Request for Comment New Market Regulation Fee Model 10

11 Other Alternatives Considered Two other fee model alternatives were identified, developed, and presented to the Committee: one group of alternatives that used orders as well as trades (in different proportions) to allocate non-it costs, and another alternative that used shares traded (i.e., the sole driver under the current model) to allocate non-it costs. All of these other alternatives included the same minimum fee as the proposed model and also allocated IT costs using messages. Financial Analysis and Evaluation Against Guiding Principles These differences among marketplaces are reflected in the outcomes under the proposed model (indicated in shaded column D below) and the principal alternatives considered 6 : IT cost allocated by messages Non IT cost allocated by : 33% Orders 20 % Orders 0% Orders % change Marketplace Current Model 67% Trades 80 % Trades 100 % Trades Shares Traded A B C D E B - A C - A D-A E-A Apr/08 - Mar/09 A $ 14,991,509 $ 16,878,533 $ 17,133,121 $ 17,625,563 $ 15,004, % 14.29% 17.57% 0.09% Apr/09 - Mar/10 12,918,321 14,108,535 14,388,821 14,809,323 12,860, % 11.38% 14.64% -0.45% Oct/09 - Mar/10 6,132,237 7,252,345 7,326,004 7,436,513 6,417, % 19.47% 21.27% 4.65% Apr/08 - Mar/09 B $ 4,907,458 $ 281,092 $ 320,920 $ 380,951 $ 3,295, % % % % Apr/09 - Mar/10 5,502, , , ,444 3,506, % % % % Oct/09 - Mar/10 3,248, , , ,485 2,012, % % % % Apr/08 - Mar/09 C $ 102,850 $ 81,612 $ 75,228 $ 68,809 $ 101, % % % -1.16% Apr/09 - Mar/10 3,254,067 3,143,111 3,149,804 3,159,854 3,189, % -3.20% -2.90% -1.99% Oct/09 - Mar/10 2,451,663 2,383,234 2,404,283 2,435,871 2,379, % -1.93% -0.64% -2.94% Apr/08 - Mar/09 D $ 143,446 $ 1,772,548 $ 1,636,866 $ 1,313,296 $ 1,043, % % % % Apr/09 - Mar/10 876,744 4,408,341 4,141,338 3,740,759 2,605, % % % % Oct/09 - Mar/10 558,044 2,258,052 2,173,252 2,046,023 1,369, % % % % Apr/08 - Mar/09 E $ 213,825 $ 996,388 $ 865,129 $ 674,016 $ 669, % % % % Apr/09 - Mar/10 272, , , , , % % % % Oct/09 - Mar/10 147, , , , , % % % % Apr/08 - Mar/09 F $ 96,671 $ 94,925 $ 107,380 $ 126,327 $ 80, % 11.08% 30.68% % Apr/09 - Mar/10 186, , , , , % -1.78% 18.04% % Oct/09 - Mar/10 101,996 84,200 96, ,143 70, % -4.92% 13.87% % Apr/08 - Mar/09 G $ 19,068 $ 243,121 $ 209,576 $ 159,256 $ 152, % % % % Apr/09 - Mar/10 25,918 58,195 58,547 59,075 58, % % % % Oct/09 - Mar/10 19,543 29,395 29,747 30,275 29, % 52.22% 54.92% 51.14% Apr/08 - Mar/09 H $ 27,830 $ 57,600 $ 57,600 $ 57,600 $ 57, % % % % Apr/09 - Mar/10 32,358 57,600 57,600 57,600 57, % 78.01% 78.01% 78.01% Oct/09 - Mar/10 23,684 28,800 28,800 28,800 28, % 21.60% 21.60% 21.60% Apr/08 - Mar/09 I $ 6,698 $ 57,600 $ 57,600 $ 57,600 $ 57, % % % % Apr/09 - Mar/10 6,808 57,600 57,600 57,600 57, % % % % Oct/09 - Mar/10 3,305 28,800 28,800 28,800 28, % % % % Under each of the alternatives to the current model, if a marketplace s percentage share of messages or trades or orders is greater than its percentage share of shares traded, its fee would be higher under the alternatives compared to the current model. For example, marketplace D s percentage share of messages, trades and orders is greater than its 6 The table presents data for three periods: the one-year period April 2008 to March 2009, the one-year period April 2009 to March 2010, and the six-month period October 2009 to March Data for the final six-month period is presented to reflect recent trends in market share among marketplaces; the amounts are lower in part because of the shorter time period included (six months vs. twelve months). IIROC Notice Administrative Notice Request for Comment New Market Regulation Fee Model 11

12 percentage share of shares traded. Consequently, its fee is higher under each of the alternatives compared to the current model. Conversely, marketplace B s percentage share of messages, trades and orders is lower than its percentage share of shares traded, therefore its fee is lower under each of the alternatives. If a marketplace s percentage share of orders is greater than its percentage share of trades, the fee for a marketplace will decline as the weighting of orders decreases. For example, marketplace E s percentage share of orders is greater than its percentage share of trades. Consequently, its fee under each alternative declines as the impact of orders decreases. Conversely, A s percentage share of orders is lower than its percentage share of trades, therefore its fee increases as the weighting of orders decreases. The rationale for recommending the messages and trades model over alternatives that use orders as a driver is that the number of trades is presently the primary driver of non-it market regulation cost. As trading activity increases, the effort required to perform market regulation is affected. While orders affect costs of some direct market regulation departments, the number of orders is currently a secondary cost driver of overall market regulation costs because it is trades, rather than orders, that primarily trigger IIROC s analysis and investigation work. The proposed alternative is flexible enough to accommodate the addition of orders in the future, if circumstances warrant. With respect to the guiding principles, the rationale for recommending this alternative is as follows: fairness: the Market Regulation fee is based on the message cost driver for IT costs, and is fully connected with trades which is the primary driver of non-it costs; industry competitiveness: the proposed model produces fees that are neutral to the extent that the regulatory cost per unit (i.e. messages and trades) is the same across all marketplaces. Some marketplaces will experience a significant increase in regulatory fees compared to the current model, while others will see a fee decrease. The most active marketplaces measured by proportionate share of messages and trades pay the majority of fees, which provides a predictable way for new entrants to assess the impact of market regulation costs; transparency: the proposed model is easy to understand, consistently applied and uses reconcilable billing drivers; and cost recovery: regulatory costs are fully recovered. The proposed model is viewed as preferable to the other alternatives considered with respect to the guiding principles for the following reasons: IIROC Notice Administrative Notice Request for Comment New Market Regulation Fee Model 12

13 the alternatives which use only orders as a billing driver are less fair because orders are not the primary drivers of non-it costs; the alternative which uses shares traded is less fair because shares traded is not a driver of IT or non-it market regulation costs; all of the alternatives are the same with respect to industry competitiveness, although the messages and shares traded model results in the least significant changes to the fees payable compared to the current model (which is entirely based on shares traded); all of the alternatives are the same with respect to transparency and cost recovery. On balance, therefore, the industry committee supported management s recommendation of the messages and trades model because of its advantage with respect to fairness while still maintaining fee neutrality on a cost per unit basis. Impact of Proposal on Dealer Members The table below shows the distribution of key market cost drivers and measures among Dealer Members, grouped by CIPF category: Participating Organization Messages Orders Trades Shares Traded by CIPF Category Apr/09 - Mar/10 Integrated Dealers 30.47% 30.09% 51.20% 57.87% Oct/09 - Mar/10 with Capital >=$75 million 37.60% 37.34% 51.72% 56.98% Apr/09 - Mar/10 Retail Dealers 1.64% 1.59% 4.10% 6.08% Oct/09 - Mar/10 with Capital < $5 million 1.03% 0.95% 5.26% 8.04% Apr/09 - Mar/10 Retail Dealers 13.03% 13.05% 12.12% 17.82% Oct/09 - Mar/10 with Capital between $5 and $75 million 12.47% 12.47% 12.17% 17.18% Apr/09 - Mar/10 Institutional Dealers 22.45% 22.78% 4.20% 1.86% Oct/09 - Mar/10 with Capital < $5 million 24.53% 24.92% 3.50% 1.70% Apr/09 - Mar/10 Institutional Dealers 32.41% 32.49% 28.37% 16.34% Oct/09 - Mar/10 with Capital between $5 and $75 million 24.37% 24.31% 27.35% 16.08% IIROC Notice Administrative Notice Request for Comment New Market Regulation Fee Model 13

14 The table below outlines the impact of this proposal on current Dealer Members, again grouped by CIPF category: IT cost allocated by messages Participating Non IT cost allocated by : Organization 33% Orders 20 % Orders 0% Orders % change by CIPF Current Model 67% Trades 80 % Trades 100 % Trades Shares Traded Category A B C D E B - A C - A D-A E-A Apr/09 - Mar/10 Integrated Dealers $ 13,357,808 $ 9,022,222 $ 9,450,948 $ 9,825,022 $ 11,105, % % % % Oct/09 - Mar/10 with Capital >=$75 million 7,229,409 5,458,225 5,615,046 5,749,787 6,280, % % % % Apr/09 - Mar/10 Retail Dealers $ 1,408,526 $ 626,139 $ 671,182 $ 707,140 $ 1,023, % % % % Oct/09 - Mar/10 with Capital < $5 million 1,016, , , , , % % % % Apr/09 - Mar/10 Retail Dealers $ 4,096,779 $ 2,890,905 $ 2,878,528 $ 2,887,257 $ 3,688, % % % -9.97% Oct/09 - Mar/10 with Capital between $5 and $75 million 2,177,235 1,551,859 1,552,525 1,559,445 1,938, % % % % Apr/09 - Mar/10 Institutional Dealers $ 429,785 $ 3,508,884 $ 3,121,553 $ 2,829,150 $ 2,163, % % % % Oct/09 - Mar/10 with Capital < $5 million 225,873 2,103,648 1,870,114 1,693,133 1,361, % % % % Apr/09 - Mar/10 Institutional Dealers $ 3,775,323 $ 6,969,279 $ 6,895,218 $ 6,768,860 $ 5,036, % 82.64% 79.29% 33.42% Oct/09 - Mar/10 with Capital between $5 and $75 million 2,034,804 3,191,650 3,223,205 3,225,363 2,397, % 58.40% 58.51% 17.81% The relationship between IIROC s cost drivers (messages and trades) and the impact on Market Regulation are the same for Dealer Members as they are for Marketplace Members. Dealer Members that have a greater share of messages or trades compared to their share of shares traded will incur higher fees under the proposed model compared to the current model. Under the proposed model approximately 25% of dealer Members who trade on marketplaces will see a fee increase, and the remainder will experience a fee decrease. As noted above, IIROC currently collects the Market Regulation fee from Dealer Members in respect of their trading activity. 7 IIROC considered, as an alternative, billing Marketplace Members directly for the Market Regulation fee. Dealer Members on the Committee raised concerns with respect to the manner in which the arrangement would promote the guiding principles of fairness and transparency, given that IIROC would control neither the manner in which Marketplace Members disclosed the Market Regulation fee to their users nor the manner in which Marketplace Members allocated the fee among their users. In light of these legitimate concerns, IIROC therefore proposes to continue the Dealer Member billing arrangement for marketplaces, for an administrative fee of $500 per month for each marketplace. Request for Comments IIROC seeks written comments on the proposed new Market Regulation Fee Model. Comment letters should be delivered by January 29, 2011 (60 days from the publication date of this notice) addressed to the attention of: 7 The only exception is Liquidnet, which does not accept Dealer Members as subscribers and so is billed directly. IIROC Notice Administrative Notice Request for Comment New Market Regulation Fee Model 14

15 Keith Persaud Senior Vice President, Finance & Administration 121 King Street West, Suite 1600 Toronto, ON M5H 3T9 IIROC Notice Administrative Notice Request for Comment New Market Regulation Fee Model 15