## _cr0861 - 23.      Principles for secondary markets—The operation of an exchange is subject to an

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### Overview
- Exchanges subject to an authorization regime based on eligibility criteria including financial viability, capacity, governance, and fair access.
- Alternative Trading Systems (ATS) are regulated as dealers subject to certain market requirements; framework allows regulatory agencies to regulate them as exchanges once they reach a certain threshold.
- Exchanges and SROs have developed market surveillance mechanisms complemented by regulatory surveillance; pre-trade and post-trade transparency exist, with public post-trade information.
- Clearing entities for securities and derivatives have mechanisms to manage large exposures, including selection criteria for clearing members, margins and collateral.

### Key implementation findings (summary of IOSCO Principles)
- Principle 1: Responsibilities of regulatory agencies clearly stated; coordination under the CSA has improved but duplication remains.
- Principle 2: Largest agencies are independent and fully self-funded; strong accountability mechanisms exist.
- Principle 3: Agencies have sufficient powers and staff except for registration of CIS operators.
- Principle 4: High transparency and public consultation; active investor education.
- Principle 5: Codes of ethics and reporting obligations in place.
- Principle 6–7: SROs (IDA, MFDA, RS, MX, CSF, and TSX/TSXV as SROs under IOSCO) play significant roles and are subject to oversight and authorization criteria addressing integrity, financial viability, capacity, governance and fair access.
- Principle 8–9: Broad inspection, investigative, surveillance and enforcement powers; can conduct on-site inspections without prior notice and obtain books and records without judicial action.
- Principle 10: Credible supervision system in place; enforcement coordination with criminal authorities and criminal enforcement remain areas needing improvement.
- Principle 11–13: Broad authority and mechanisms to share public and nonpublic information domestically and internationally; OSC and AMF signatories to IOSCO MMoU among largest jurisdictions.
- Principle 14–16: Issuers subject to prospectus and continuous disclosure regimes; Canadian GAAP and Canadian AS required; convergence to IFRS targeted by 2011.
- Principle 17–20: CIS regulated via NI 81–101/106 with disclosure, valuation and NAV rules; CIS operators not yet subject to registration (identified deficiency).
- Principle 21–24: Market intermediaries subject to registration, capital and conduct requirements; IDA and MFDA early warning systems and compensation funds exist (maximum coverage $1,000,000 per customer account).
- Principle 25–28: Exchanges and trading systems regulated and supervised; RS has automated real-time surveillance (capacity 650,000 trades a day); MX surveillance more post-trade currently; UMIR prohibitions against manipulation; pre- and post-trade transparency provided (exchanges publish data with a 15 minute delay).
- Principle 29: CDS and CDCC have measures for large exposures (CDS soft CPP cap presently set at CAN$80 million).
- Principle 30: A separate CPSS-IOSCO assessment was conducted; Principle 30 not assessed in this document.

### Detailed findings — Regulator and governance
- Provincial regulation: 13 regulatory agencies derive authority from provincial legislation; OSC and AMF highlighted.
- Coordination: CSA (non-statutory) coordinates; Policy Coordination Committee and secretariat in Montreal.
- Independence and accountability:
  - OSC: self-funded crown corporation; board of 13 commissioners; commissioners appointed by Order in Council for up to five-year terms.
  - AMF: unified regulator with president and CEO appointed for five-year period and removable only for valid reason.
  - Budget and audit procedures: submission to Minister of Finance; audited financial statements; annual reports (OSC within 6 months, AMF not later than July 31).
- Resources and staffing:
  - OSC staffing level: 424 staff.
  - AMF staffing level: 630 staff (responsibilities beyond securities markets).
  - Turnover ratios: OSC around 7 percent; AMF around 5 percent.
  - OSC enforcement division growth: from roughly 39 in 1999 to 116 in 2007.
  - AMF enforcement division growth: from around 46 in 2006 to 91 in 2007.
- Assessment status highlights: many principles Implemented or Broadly implemented; some Partly implemented (e.g., Principle 3, Principle 10, Principle 17).

### Detailed findings — Self-Regulatory Organizations (SROs)
- Recognized SROs: MX, IDA, MFDA, CSF, RS; TSX and TSXV considered SROs under IOSCO though they outsource regulation to RS.
- Oversight mechanisms: recognition orders, periodic reporting, on-site inspections (three-year cycle goal), approval of rules by regulators, appeals to regulators or tribunals.
- On-site inspection coverage: CSA goal three-year cycle mostly met except CDCC at time of report.
- Coordination issues: approval processes and timely consensus among provinces can be challenging; suggested improvements noted.

### Detailed findings — Enforcement and investigations
- Powers: Authorities can seek injunctions, civil proceedings, suspensions, asset freezes, compel third-party testimony, and refer matters to criminal authorities.
- Sharing: Broad authority to share information domestically and with foreign regulators even without MoUs.
- Coordination and criminal enforcement:
  - IMETs established in 2003 with CAN$30 million per year funding; Toronto IMET coordination working adequately but concerns about visible accomplishments and staffing persist.
  - AMF and OSC have increased enforcement staffing and reduced case-processing times (AMF average investigation time reduced from 44 months to 22 months; end goal 18 months).
- Enforcement statistics (CSA semi-annual reports):
  - Period 4/2004–3/2005: Regulators Proceedings Commenced 142; Sanctions Ordered 66; Settlement Agreements 81; Withdrawn 8; SROs 8 and 19 (second semester only).
  - Period 4/2005–3/2006: Regulator 96; Sanctions Ordered 62; Settlement Agreements 70; Withdrawn 7; SROs 39 and 31.
  - Period 4/2005–3/2007: Regulator 122; Sanctions Ordered 69; Settlement Agreements 59; Withdrawn 10; SROs 33 and 31.
  - OSC Surveillance responses in fiscal year 2005–2006: responded to approximately 16,000 requests for information, of which 775 were from foreign regulators; nine ongoing enforcement related investigations of mutual interest.

### Detailed findings — Issuers and disclosure
- Prospectus and continuous disclosure instruments: NI 41–101, 44–101, 44–102, 45–106, 51–102, 71–102.
- Continuous disclosure deadlines:
  - Annual financial statements with audit report and MD&A within 90 days of fiscal year end—120 days for venture issuers.
  - Quarterly financial statements and MD&A within 45 days after interim period ends—60 days for venture issuers.
  - Material changes report: file formal report within 10 days of the date on which the change occurs.
- Prospectus review model: MRRS principal regulator assigned by head office location; non-principal regulators have five-day comment window and can opt out.
- Liability: issuers subject to strict liability for prospectus; underwriters subject to due diligence regime; extension of liability to continuous disclosure in some provinces (Ontario, Alberta and Québec amendments adopted November 9, 2007).

### Detailed findings — Collective Investment Schemes (CIS)
- Harmonized instruments: NI 81–101, NI 81–106.
- Deficiency: CIS operators/managers not subject to registration at time of report; on-site inspections not regular in at least one large agency (AMF).
- Mitigating factors: CIS operators often also dealers/advisers subject to registration; NI 81-107 requires Independent Review Committee (IRC) for conflict of interest oversight.
- Disclosure and valuation:
  - Ongoing CIS disclosure: annual and semi-annual financial statements; Management Report of Fund Performance; quarterly portfolio composition; NAV at least once a week (or daily if derivatives used).
  - NAV calculation per Canadian GAAP; CICA Guideline 18 requires fair value; change in October 2006 to value investments in an active market at bid and ask price.
- Custodian requirements: conventional funds must have a custodian; non-conventional funds not required but typically do; NI 41–101 pending to require all CIS to have a custodian.
- Assessment: Principle 17 Partly implemented due to lack of registration regime; proposed NI 31–103 expected to require registration (proposed implementation by July 1, 2008 per authorities’ comments).

### Detailed findings — Market intermediaries
- Registration/standards:
  - Market intermediaries subject to registration; harmonization pending (NI 31–103 proposed).
  - IDA and MFDA set practical harmonization for many dealer requirements.
- Capital and prudential requirements:
  - IDA minimum capital ranges: CAN$25,000 (level 1) to CAN$200,000 (level 4).
  - MFDA minimum capital ranges: CAN$75,000 (type 1) to CAN$250,000 (type 4).
  - Early warning systems and monthly financial reporting required.
- Compensation funds and limits:
  - Compensation funds (CIPF and MFDIPF) cover losses from insolvency; maximum coverage $1,000,000 per customer account.
- On-site inspection cycles and risk models:
  - IDA: high-risk firms financial on-site reviews annually; other tiers every other year.
  - MFDA: financial on-site reviews annually for high risk; sales reviews every three years for high risk.
  - OSC/AMF use risk assessment questionnaires and target on-site inspections accordingly.

### Detailed findings — Secondary markets, exchanges and surveillance
- NI 21–101 and NI 23–101 harmonized marketplace operation and trading rules.
- Exchange recognition criteria include financial viability, capacity, clearing/settlement arrangements, equitable treatment, dispute resolution, record-keeping (seven years), market disorder mechanisms, approval of rules, and consultation.
- Surveillance systems:
  - RS (surveillance for TSX, TSXV, CNQ and equity ATS): automated real-time monitoring, SMARS/IMM alerting, capacity to handle 650,000 trades a day (capacity determined as 2.5 times peak day volume, validated quarterly).
  - MX: semi-automated SOLA Surveillance, currently post-trade monitoring; AMF planning to acquire SMARTS for real-time surveillance.
  - No MoU between RS and MX at time of report; coordination recommendation in progress.
- Transparency:
  - Corporate debt: CanPX information processor; trades to be reported within an hour.
  - Equity and derivatives: information provided to vendors in real time and publicly on exchange web sites with a 15 minute delay.
  - Exemption exists for government debt securities.
- Large exposures and clearing:
  - CDS central counterparty pre-settlement edits prevent negative fund account balances; soft CPP cap presently set at CAN$80 million.
  - CDCC for MX: selection criteria for clearing members, initial and daily margins, additional margins for low-capital members.
  - MoUs: between IDA and CDS, and IDA and CDCC for monitoring and notification when members trigger early warning.

### Recommended action plan (selected items)
- Principle 1: Provincial regulators should continue to improve coordination.
- Principle 3 / 17 / 21: Approve proposed National Instrument 31–103 Registration Requirements to establish registration for mutual fund operators and harmonize registration requirements for market intermediaries.
- Principle 7:
  1) Streamline coordination of SRO regulation and supervision, including the approval process for regulations.
  2) AMF should conduct on-site inspection of CSF.
  3) Explore shorter cycle of on-site inspections for SROs, particularly IDA and MFDA.
  4) Request RS to provide an annual self-assessment of its regulatory performance.
- Principle 10:
  1) Prioritize discussion of federal task force report on enforcement.
  2) Develop a coordinated enforcement strategy between provincial regulators and the federal government, with clear accountability and benchmarks; a formal MoU is encouraged.
  3) OSC and AMF to continue reducing investigation timelines.
  4) CSA could compile additional enforcement statistics, including timeliness.
- Principle 12: AMF and Government of Quebec should define an efficient approval procedure for MoUs.
- Principle 14: Encourage prompt approval of new derivatives market framework in Quebec and expansion of liability to continuous disclosure obligations across provinces.
- Principle 18: Require all CIS to have a custodian (approval of proposed NI 41–101).
- Principle 26: Finalize MoU between RS and MX.
- Principle 27: Explore additional transparency in the government debt market.

*Source: _cr0861 - 23.      Principles for secondary markets—The operation of an*

### Executive Summary ......................................................................................................

### Executive Summary

### Introduction and scope
- Assessment conducted from September 10–21, 2007 as part of the Financial Sector Assessment Program by Ana Carvajal, Monetary and Capital Markets Department.
- Assessment based on the IOSCO Principles and Objectives of Securities Regulation and the associated Methodology adopted in 2003. Principle 30 was not assessed here (CPSS/IOSCO Assessment conducted separately).
- Given practical constraints, the assessment largely relied on the regulatory frameworks of Ontario and Quebec to draw inferences for the country as a whole, noting where important differences exist between these provinces and others.

### Information and methodology used
- Relied on:
  - Self-assessments by the Ontario Securities Commission (OSC) and the Autorité des Marchés Financiers (AMF).
  - Review of laws, regulations, procedures, manuals, and guidelines.
  - Meetings with OSC and AMF board members and staff, Finance Canada, Bank of Canada, and market participants.
- Noted that an IOSCO assessment was conducted in 1999 but the 2007 assessment is a full assessment using the 2003 Methodology.

### Description of regulatory structure and practices
- Canada operates under provincial regulation and supervision with 13 regulatory authorities, each administering a separate set of securities laws and regulations.
- The four largest jurisdictions—Alberta, British Columbia, Ontario and Quebec—roughly supervise 95 percent of the market; these agencies are operationally independent and fully self-funded by levies imposed on market participants.
- The AMF exercises enforcement powers through an independent tribunal, the Bureau de Décision et de Révision en Valeurs Mobilières (BDRVM).
- The Canadian Securities Administrators (CSA) is a non-statutory association coordinating provincial regulators and promoting harmonization via national instruments.
- Mutual reliance review system (MRRS) exists for issuers and CIS; National Registration System (NRS) developed for registrants though full harmonization has not occurred.
- Provincial regulators rely heavily on SROs. Main SROs include:
  - Investment Dealers Association of Canada (IDA)
  - Mutual Fund Dealers Association of Canada (MFDA)
  - Chambre de la sécurité financière (CSF) in Quebec
  - Market Regulation Services Inc. (RS)
  - Montréal Exchange (MX); equity exchanges (TSX and TSXV) are SROs but have outsourced market regulation functions to RS.
- A proposal for merger of IDA and RS has been submitted to regulators.

### Market structure
- Main categories of securities intermediaries: investment dealers, mutual fund dealers, and advisors; categories and requirements vary across provinces.
- Investment dealers and mutual fund dealers generally required to be members of an SRO (except mutual fund representatives in Quebec belong to CSF while mutual fund firms are not).
- Exchanges operate under specialization model (noncompetition agreement): TSX (senior equities), TSXV (junior equities), MX (derivatives). TSX announced plans to pursue a derivatives market once the agreement expires in 2009.
- Key market statistics:
  - TSX Group market capitalization as of December 2006: US$1,701 billion.
  - TSX traded value for 2006: US$1,282 billion.
  - In 2006 there were 195 interlisted issuers out of 1,598 TSX-listed issuers.
  - Combined market value of interlisted issuers: US$1.2 trillion or 61 percent of the total domestic market.
- Ontario’s market share and concentration:
  - Approximately 31 percent of listed issuers are based in Ontario.
  - Ontario accounts for 46 percent of Canada’s equity markets.
  - 60 percent of IDA member firms have their Canadian head office in Ontario.
  - 76 percent of CIS assets are held by firms based in Ontario.
  - 49 percent of the assets of the top 100 employer funds are held by Ontario-based pension funds.

### General preconditions for effective securities regulation
- Preconditions appear to be in place, including sound macroeconomic policies, appropriate legal, tax and accounting frameworks, and absence of entry barriers.

### Main findings
- Overall assessment:
  - The regulatory framework exhibits high levels of implementation of IOSCO Principles.
  - Regulatory framework for most areas covered by securities regulation is robust.
  - Gaps identified in regulation and supervision of collective investment schemes (CIS) and in enforcement, which needs further improvement.
- Regulator-related principles:
  - Largest regulatory agencies are independent, self-funded, and have sufficient resources and skilled personnel.
  - High transparency and accountability, including public consultation, published policy statements, ethics code, and investor education activity.
  - Coordination under the CSA is progressing unevenly; issuers, CIS and registrants show more progress.
- SRO-related principles:
  - SROs are subject to authorization criteria addressing financial viability, capacity, governance, and fair access.
  - Supervision includes off-site reporting, on-site inspections, regular meetings, and ongoing liaison with SRO staff.
- Enforcement principles:
  - Canada has a credible supervision system with significant SRO roles. Enforcement has improved but requires considerable further improvement.
  - Criminal and securities law enforcement are handled by different authorities; cooperation exists in certain circumstances but a coordinated approach with clear accountability and benchmarks is lacking.
  - Federal and provincial authorities have taken steps toward better coordination.
- Cooperation principles:
  - The four largest regulatory agencies have explicit powers to share information domestically and internationally without external approval; they are signatories of the IOSCO Multilateral Memorandum of Understanding (MMoU).
  - They can obtain information on behalf of foreign regulators and have demonstrated commitment to information exchange and assistance.
- Issuer-related principles:
  - Issuers are subject to disclosure obligations at authorization and on an ongoing basis, aligned with IOSCO standards.
  - Regulatory agencies have systems for prospectus review and continuous disclosure; liability provisions exist for prospectus responsibility.
- CIS-related principles and gaps:
  - CIS operators are not subject to a registration regime, limiting regulator ability to impose eligibility criteria and exercise full disciplinary powers.
  - Some mitigation: under securities laws CIS operators are “market participants” and subject to certain minimum obligations.
  - Public offerings of CIS are subject to disclosure requirements at authorization and ongoing, consistent with IOSCO.
  - Rules on separation of assets exist, but not all CIS are required to have a custodian.
  - Supervision of mutual funds and their operators is not a regular oversight program component for one major regulatory agency, though targeted reviews are conducted.
- Market intermediaries:
  - Investment dealers, mutual fund dealers and advisors are subject to registration regimes with eligibility criteria including integrity, financial viability, internal controls, and risk management.
  - Supervision of investment dealers and mutual fund dealers is largely carried out by their respective SROs (except mutual fund dealers in Quebec, supervised by the AMF).
  - SROs use risk assessment models to determine inspection focus and frequency; regulatory agencies supervise advisors (and mutual fund dealers in Quebec) using risk assessment models.
  - Investment dealers and mutual fund dealers are required to participate in contingency funds.

*Source: IMF staff assessment (Executive Summary, _cr0861)._*

### 23.      Principles for secondary markets—The operation of an exchange is subject to an

### _cr0861 - 23.      Principles for secondary markets—The operation of an exchange is subject to an

### Overview
- Exchanges are subject to an authorization regime based on eligibility criteria that include financial viability, capacity, governance, and fair access.
- Alternative Trading Systems (ATS) are regulated as dealers subject to certain market requirements; the framework allows regulatory agencies to regulate them as exchanges once they reach a certain threshold.
- Exchanges and SROs have developed market surveillance mechanisms complemented by regulatory surveillance; pre-trade and post-trade transparency exist, with public post-trade information.
- Clearing entities for securities and derivatives have mechanisms to manage large exposures, including selection criteria for clearing members, margins and collateral.

### Key implementation findings (summary of IOSCO Principles)
- Principle 1: Responsibilities of regulatory agencies clearly stated; coordination under the CSA has improved but duplication remains.
- Principle 2: Largest agencies are independent and fully self-funded; strong accountability mechanisms exist.
- Principle 3: Agencies have sufficient powers and staff except for registration of CIS operators.
- Principle 4: High transparency and public consultation; active investor education.
- Principle 5: Codes of ethics and reporting obligations in place.
- Principle 6–7: SROs (IDA, MFDA, RS, MX, CSF, and TSX/TSXV as SROs under IOSCO) play significant roles and are subject to oversight and authorization criteria addressing integrity, financial viability, capacity, governance and fair access.
- Principle 8–9: Broad inspection, investigative, surveillance and enforcement powers; can conduct on-site inspections without prior notice and obtain books and records without judicial action.
- Principle 10: Credible supervision system in place; enforcement coordination with criminal authorities and criminal enforcement remain areas needing improvement.
- Principle 11–13: Broad authority and mechanisms to share public and nonpublic information domestically and internationally; OSC and AMF signatories to IOSCO MMoU among largest jurisdictions.
- Principle 14–16: Issuers subject to prospectus and continuous disclosure regimes; Canadian GAAP and Canadian AS required; convergence to IFRS targeted by 2011.
- Principle 17–20: CIS regulated via NI 81–101/106 with disclosure, valuation and NAV rules; CIS operators not yet subject to registration (identified deficiency).
- Principle 21–24: Market intermediaries subject to registration, capital and conduct requirements; IDA and MFDA early warning systems and compensation funds exist (maximum coverage $1,000,000 per customer account).
- Principle 25–28: Exchanges and trading systems regulated and supervised; RS has automated real-time surveillance (capacity 650,000 trades a day); MX surveillance more post-trade currently; UMIR prohibitions against manipulation; pre- and post-trade transparency provided (exchanges publish data with a 15 minute delay).
- Principle 29: CDS and CDCC have measures for large exposures (CDS soft CPP cap presently set at CAN$80 million).
- Principle 30: A separate CPSS-IOSCO assessment was conducted; Principle 30 not assessed in this document.

### Detailed findings — Regulator and governance
- Provincial regulation: 13 regulatory agencies derive authority from provincial legislation; OSC and AMF highlighted.
- Coordination: CSA (non-statutory) coordinates; Policy Coordination Committee and secretariat in Montreal.
- Independence and accountability:
  - OSC: self-funded crown corporation; board of 13 commissioners; commissioners appointed by Order in Council for up to five-year terms.
  - AMF: unified regulator with president and CEO appointed for five-year period and removable only for valid reason.
  - Budget and audit procedures: submission to Minister of Finance; audited financial statements; annual reports (OSC within 6 months, AMF not later than July 31).
- Resources and staffing:
  - OSC staffing level: 424 staff.
  - AMF staffing level: 630 staff (responsibilities beyond securities markets).
  - Turnover ratios: OSC around 7 percent; AMF around 5 percent.
  - OSC enforcement division growth: from roughly 39 in 1999 to 116 in 2007.
  - AMF enforcement division growth: from around 46 in 2006 to 91 in 2007.
- Assessment status highlights: many principles Implemented or Broadly implemented; some Partly implemented (e.g., Principle 3, Principle 10, Principle 17).

### Detailed findings — Self-Regulatory Organizations (SROs)
- Recognized SROs: MX, IDA, MFDA, CSF, RS; TSX and TSXV considered SROs under IOSCO though they outsource regulation to RS.
- Oversight mechanisms: recognition orders, periodic reporting, on-site inspections (three-year cycle goal), approval of rules by regulators, appeals to regulators or tribunals.
- On-site inspection coverage: CSA goal three-year cycle mostly met except CDCC at time of report.
- Coordination issues: approval processes and timely consensus among provinces can be challenging; suggested improvements noted.

### Detailed findings — Enforcement and investigations
- Powers: Authorities can seek injunctions, civil proceedings, suspensions, asset freezes, compel third-party testimony, and refer matters to criminal authorities.
- Sharing: Broad authority to share information domestically and with foreign regulators even without MoUs.
- Coordination and criminal enforcement:
  - IMETs established in 2003 with CAN$30 million per year funding; Toronto IMET coordination working adequately but concerns about visible accomplishments and staffing persist.
  - AMF and OSC have increased enforcement staffing and reduced case-processing times (AMF average investigation time reduced from 44 months to 22 months; end goal 18 months).
- Enforcement statistics (CSA semi-annual reports):
  - OSC/AMF/Csa-regulators activity table excerpts:
    - Period 4/2004–3/2005: Regulators Proceedings Commenced 142; Sanctions Ordered 66; Settlement Agreements 81; Withdrawn 8; SROs 8 and 19 (second semester only).
    - Period 4/2005–3/2006: Regulator 96; Sanctions Ordered 62; Settlement Agreements 70; Withdrawn 7; SROs 39 and 31.
    - Period 4/2005–3/2007: Regulator 122; Sanctions Ordered 69; Settlement Agreements 59; Withdrawn 10; SROs 33 and 31.
  - OSC Surveillance responses in fiscal year 2005–2006: responded to approximately 16,000 requests for information, of which 775 were from foreign regulators; nine ongoing enforcement related investigations of mutual interest.

### Detailed findings — Issuers and disclosure
- Prospectus and continuous disclosure instruments: NI 41–101, 44–101, 44–102, 45–106, 51–102, 71–102.
- Continuous disclosure deadlines:
  - Annual financial statements with audit report and MD&A within 90 days of fiscal year end—120 days for venture issuers.
  - Quarterly financial statements and MD&A within 45 days after interim period ends—60 days for venture issuers.
  - Material changes report: file formal report within 10 days of the date on which the change occurs.
- Prospectus review model: MRRS principal regulator assigned by head office location; non-principal regulators have five-day comment window and can opt out.
- Liability: issuers subject to strict liability for prospectus; underwriters subject to due diligence regime; extension of liability to continuous disclosure in some provinces (Ontario, Alberta and Québec amendments adopted November 9, 2007).

### Detailed findings — Collective Investment Schemes (CIS)
- Harmonized instruments: NI 81–101, NI 81–106.
- Deficiency: CIS operators/managers not subject to registration at time of report; on-site inspections not regular in at least one large agency (AMF).
- Mitigating factors: CIS operators often also dealers/advisers subject to registration; NI 81-107 requires Independent Review Committee (IRC) for conflict of interest oversight.
- Disclosure and valuation:
  - Ongoing CIS disclosure: annual and semi-annual financial statements; Management Report of Fund Performance; quarterly portfolio composition; NAV at least once a week (or daily if derivatives used).
  - NAV calculation per Canadian GAAP; CICA Guideline 18 requires fair value; change in October 2006 to value investments in an active market at bid and ask price.
- Custodian requirements: conventional funds must have a custodian; non-conventional funds not required but typically do; NI 41–101 pending to require all CIS to have a custodian.
- Assessment: Principle 17 Partly implemented due to lack of registration regime; proposed NI 31–103 expected to require registration (proposed implementation by July 1, 2008 per authorities’ comments).

### Detailed findings — Market intermediaries
- Registration/standards:
  - Market intermediaries subject to registration; harmonization pending (NI 31–103 proposed).
  - IDA and MFDA set practical harmonization for many dealer requirements.
- Capital and prudential requirements:
  - IDA minimum capital ranges: CAN$25,000 (level 1) to CAN$200,000 (level 4).
  - MFDA minimum capital ranges: CAN$75,000 (type 1) to CAN$250,000 (type 4).
  - Early warning systems and monthly financial reporting required.
- Compensation funds and limits:
  - Compensation funds (CIPF and MFDIPF) cover losses from insolvency; maximum coverage $1,000,000 per customer account.
- On-site inspection cycles and risk models:
  - IDA: high-risk firms financial on-site reviews annually; other tiers every other year.
  - MFDA: financial on-site reviews annually for high risk; sales reviews every three years for high risk.
  - OSC/AMF use risk assessment questionnaires and target on-site inspections accordingly.

### Detailed findings — Secondary markets, exchanges and surveillance
- NI 21–101 and NI 23–101 harmonized marketplace operation and trading rules.
- Exchange recognition criteria include financial viability, capacity, clearing/settlement arrangements, equitable treatment, dispute resolution, record-keeping (seven years), market disorder mechanisms, approval of rules, and consultation.
- Surveillance systems:
  - RS (surveillance for TSX, TSXV, CNQ and equity ATS): automated real-time monitoring, SMARS/IMM alerting, capacity to handle 650,000 trades a day (capacity determined as 2.5 times peak day volume, validated quarterly).
  - MX: semi-automated SOLA Surveillance, currently post-trade monitoring; AMF planning to acquire SMARTS for real-time surveillance.
  - No MoU between RS and MX at time of report; coordination recommendation in progress.
- Transparency:
  - Corporate debt: CanPX information processor; trades to be reported within an hour.
  - Equity and derivatives: information provided to vendors in real time and publicly on exchange web sites with a 15 minute delay.
  - Exemption exists for government debt securities.
- Large exposures and clearing:
  - CDS central counterparty pre-settlement edits prevent negative fund account balances; soft CPP cap presently set at CAN$80 million.
  - CDCC for MX: selection criteria for clearing members, initial and daily margins, additional margins for low-capital members.
  - MoUs: between IDA and CDS, and IDA and CDCC for monitoring and notification when members trigger early warning.

### Recommended action plan (selected items from Table 3)
- Principle 1: Provincial regulators should continue to improve coordination.
- Principle 3 / 17 / 21: Approve proposed National Instrument 31–103 Registration Requirements to establish registration for mutual fund operators and harmonize registration requirements for market intermediaries.
- Principle 7:
  1) Streamline coordination of SRO regulation and supervision, including the approval process for regulations.
  2) AMF should conduct on-site inspection of CSF.
  3) Explore shorter cycle of on-site inspections for SROs, particularly IDA and MFDA.
  4) Request RS to provide an annual self-assessment of its regulatory performance.
- Principle 10:
  1) Prioritize discussion of federal task force report on enforcement.
  2) Develop a coordinated enforcement strategy between provincial regulators and the federal government, with clear accountability and benchmarks; a formal MoU is encouraged.
  3) OSC and AMF to continue reducing investigation timelines.
  4) CSA could compile additional enforcement statistics, including timeliness.
- Principle 12: AMF and Government of Quebec should define an efficient approval procedure for MoUs.
- Principle 14: Encourage prompt approval of new derivatives market framework in Quebec and expansion of liability to continuous disclosure obligations across provinces.
- Principle 18: Require all CIS to have a custodian (approval of proposed NI 41–101).
- Principle 26: Finalize MoU between RS and MX.
- Principle 27: Explore additional transparency in the government debt market.

*Source: _cr0861 - 23.      Principles for secondary markets—The operation of an exchange is subject to an*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr0861.pdf_