Front Matter Page

IMF Country Report No. 14/73

CANADA

FINANCIAL SECTOR ASSESSMENT PROGRAM

March 2014

IOSCO OBJECTIVES AND PRINCIPLES OF SECURITIES REGULATION—DETAILED ASSESSMENT OF IMPLEMENTATION

This Detailed Assessment of Implementation of IOSCO Objectives and Principles of Securities Regulation on Canada was prepared by a staff team of the International Monetary Fund as background documentation for the periodic consultation with the member country. It is based on the information available at the time it was completed in February 2014.

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Front Matter Page

CANADA

FINANCIAL SECTOR ASSESSMENT PROGRAM

February 2014

IOSCO OBJECTIVES AND PRINCIPLES OF SECURITIES REGULATION

DETAILED ASSESSMENT OF IMPLEMENTATION

Prepared By

Monetary and Capital Markets Department

Contents

• GLOSSARY

• SUMMARY

• INTRODUCTION AND SCOPE

• DESCRIPTION OF REGULATORY STRUCTURE AND PRACTICES

• MARKET STRUCTURE

• A. Markets

• B. CIS

• C. Intermediaries

• GENERAL PRECONDITIONS FOR EFFECTIVE SECURITIES REGULATION

• MAIN FINDINGS

• A. Authorities’ Response to the Assessment

• DETAILED ASSESSMENT

• TABLES

• 1. ATS

• 2. Fund Type by AUM

• 3. Summary Implementation of the IOSCO Principles—Detailed Assessments

• 4. Recommended Action Plan to Improve Implementation of the IOSCO Principles

• 5. Detailed Assessment of Implementation of the IOSCO Principles

• FIGURE

• 1. Market Share Trend (TSX Listed Stocks)

Glossary

Summary

1. This assessment has been conducted under the methodology for targeted assessments.¹ A full assessment was conducted in 2007 based on the methodology approved by IOSCO in 2003. As a result Canada met the threshold for a targeted assessment. Based on the due diligence conducted the assessment covered principles 1, 2, 3, 6, 7, 8, 9, 12, 19, 20, 22, 23, 24, 28, 29, 30, 31, 32, 34, and 35 in their entirety while principles 25 and 37 were partially reassessed. Nothing in the due diligence suggested the need to reassess the remaining principles. The guidance for targeted assessments requires the assessor to carry over the description of the principles that have not been assessed in order to provide a complete view.

2. The Canadian framework for the regulation and supervision of securities markets demonstrates a high level of implementation of the IOSCO Principles. The securities regulatory agencies have been given broad powers to regulate and supervise the markets. Furthermore, in a few areas such as enforcement powers, such powers could be considered leading practices. The provincial regulators have increasingly achieved a high degree of harmonization of their regulatory frameworks and significant efforts have been made at the supervisory front to coordinate, and streamline processes and procedures and to achieve convergence in supervisory practices. Robust arrangements have also been developed for the supervision of many categories of market participants, and use of enforcement powers by the largest provincial regulators has been strengthened significantly.

3. Despite these gains, developing an integrated and robust view of risks to support supervisory actions remains a key challenge. Further action would be beneficial on several fronts, as detailed below.

• Stronger coordination: Within the current framework, several different regulatory agencies and SROs are in charge of the supervision of different components of the securities markets, which makes it challenging to have a “full” view of risks. The regulators have developed arrangements for coordination; however it is key that such arrangements continue to be further strengthened to ensure that a two way communication exists.

• Additional capacity in very specialized areas. As many other securities regulators in industrialized countries, the four agencies face resource challenges which have arisen from the increased complexity of their securities markets. The agencies are aware of this challenge and in recent years have incorporated other profiles in their staff (such as staff with expertise in trading, management and manufacturing of products, and more generally staff with market experience, as well as economists) to ensure a full understanding of the risks posed by different activities and products, as well as their implications for the whole financial sector.

• More robust use of quantitative analysis. Quantitative analysis is not only necessary for the identification of systemic risks, but it can also enrich discussions on emerging risks, even at the conduct level. However, currently the collection and use of quantitative data by the regulatory agencies varies, and thus there is a need to ensure that the right type of data is collected in a uniform and consistent manner and is available for analysis to the provincial regulators, and in particular to the CSA Committee on Risk. Additional work “on the ground:” On-site inspections are a key tool for early detection of poor practices and conduct problems, as well as weaknesses on internal controls and risk management, and to assess whether regulated firms are compliant with their respective regulatory perimeters. Thus, they are a key tool for risk identification, along with other tools such as reporting, complaints and market intelligence. The on-site inspection programs of the securities regulatory agencies are developed based on a risk-based approach. This approach has resulted in a more focused use of on-site inspections by the regulators with the largest populations. While overall the supervision of intermediaries is adequate, it is important that the authorities continually consider measures to increase the number of on-site inspections and refine their risk-based approach.

4. Use of enforcement powers in connection with criminal offenses remains a second key challenge. In spite of several efforts to improve criminal enforcement, including efforts by the provincial regulators to engage with the criminal authorities, results in this area are mixed and are visible in only in some of the largest provinces. While the challenges are partially mitigated by the increased use of quasi-criminal powers by the securities regulators, the fact remains that, cases involving the most egregious conduct, such as boiler rooms, major frauds and repeat offenders should be prosecuted by the criminal authorities, and that the investigation and prosecution of certain of these cases requires the use of exceptional powers only available to the criminal authorities. The SROs have taken important steps to ensure that they have in place strong enforcement strategies, in particular in connection with compliance reviews. It is important that such efforts continue.

5. Finally, the securities regulators should continue to take steps to ensure timely decision making in policy formulation. By its own nature policy making requires time to allow for consultation so that the impact of policy proposals can be evaluated and incorporated. However, the current governance arrangements, based on a consensus building approach across several entities, might affect timeliness of decision making.