1.

ORGANIZATION WITHIN FIRMS

 There is a three level organization structure: Front office, middle office

and back office

 Front office performs all staff functions pertaining directly to portfolio

management activities. Functions include: Portfolio management,
Trading, Sales, Marketing

 Middle office performs functions critical to the efficient operation of the

firm. Functions include: Compliance, Accounting, Audits, Legal

 Back office settles the firm’s security transactions. Functions include

Trade settlement

2. SCHEDULE 1-2-3 BANKS – LASER BEAM

BANKS AS FINANCIAL INTERMEDIARIES

 Banks operate under the Bank Act, which specifies what they can and
cannot do. Banks are the most important player in the Canadian
Securities Industry and each Bank is designated as either Schedule I,
Schedule II or Schedule III

 Schedule I Banks: most Canadian owned banks are designated Schedule I.

There are ownership rules – voting shares must be widely held and
subject to no more than 20% ownership by any individual or group. There
are more than 30 Schedule I Banks altogether – including Royal Bank,
CIBC, TD, Bank of Nova Scotia, Bank of Montreal and National Bank

 Schedule II Banks: incorporated and operate in Canada, but are owned by

a foreign parent – examples include Citibank Canada, AMEX Bank of
Canada and BNP Paribas (Canada). By law, may engage in all types of
business permitted to a Schedule I Bank; however most derive their
 greatest share of revenue from retail banking and electronic financial
services

 Schedule III Banks: foreign bank branches of foreign institutions.

Schedule III banks tend to focus on corporate and institutional finance and
investment banking.

3. FINTECH – REBO/CRYPRTO CURRENCY

FINANCIAL MARKET TRENDS

 Financial technology companies, known collectively as fintech

take advantage of computer technology to support or enable a
variety of banking and financial products and services

 Robo-advisors provide clients with goal-based online investment

management. Portfolios are created using algorithms based on
modern portfolio theory. Advisor support is offered to varying
degrees, typically online or by phone. Portfolios are built with
exchange-traded funds. Portfolios are regularly rebalanced

 Social and economic shifts include demographics (an aging

country); defined benefit and defined contribution plans (defined
benefit plans provide pre-determined payment amounts); savings
rates (common notion is that Canadians need 70% of their income
at retirement); and household debt (has increased from 100% to
disposable income in 2000 to 172% currently)
 CRYPTOCURRENCY

 Cryptoassets have been gaining popularity. They exist in digital

form and rely on peer-to-peer networking and a public ledger.
Bitcoin is the largest and most actively traded cryptocurrency

 Bitcoin was created an as alternative payment system. It was

launched in 2008 and its rising long-term price trend has been
supported by debasement of fiat currencies

 Bitcoin can be separated into Bitcoin the token (piece of the code)
and Bitcoin the protocol (maintains the ledger)

 Bitcoin’s value is derived from a medium of exchange, store of

value and investment

 Bitcoin is powered by an open-source code, blockchain. It creates

a shared public ledger that cannot be altered. A bitcoin wallet
contains a public key and a private key (password)

 Bitcoin was programmed to limit the number of bitcoins and this

limited supply has resulted in tremendous price appreciation
 4. CANADIAN STOCK EXCHANGES

 Stock Exchanges – the name says it all. A “place” to exchange

stock!

 Toronto Stock Exchange (TSX) lists equities, some convertible debt

instruments, income trusts and ETFs

 TSX Venture Exchange – equities and a few debentures

 The TSX Alpha Exchange lists equities, debentures, ETFs and

structured products. It will also offer trading in TSX and TSX
Venture Exchange securities

 Montreal Exchange (Bourse de Montreal) – financial and equity

futures and options

 ICE NGX Canada provides electronic trading and clearing to the

North American natural gas and electricity markets

 The Canadian Securities Exchange (CSE) – equities of emerging

companies
 NEO Exchange – provides listing services and facilitates trading in
securities listed on the NEO Exchange, TSX and TSX Venture
Exchange

5. FIXED-INCOME ELECTRONIC TRADING SYSTEMS

 CanDeal: fixed income trading system, a joint venture between

Canada’s six largest investment dealer, both an ATS and an
investment dealer. Offers institutional investors access to
government securities and money market instruments

 CBID and CBID Institutional: is an ATS, it operates two distinct

fixed-income marketplaces, retail and institutional

 MarketAxess provides market data and a trading platform with

access to multi-dealer competitive pricing for a wide range of
corporate bonds. It is a member of IIROC and operates in Ontario
and Quebec

 CanPX: joint venture between several Canadian investment

dealers. It combines digital feeds from participating dealers to
provide a composite display of real-time bid and offer quotations
for Government of Canada bonds and Treasury bills

6. THE REGULATORS
 Each province and territory is responsible for creating the
legislation and regulation under which a business in the securities
industry must operate. Outside of Quebec (where the regulatory
body is the Autorite des marches financiers), the financial sector
is regulated separately by the Office of the Superintendent of
Financial Institutions (OSFI)

 The Canadian Securities Administrators (CSA) is an umbrella

organization of Canada’s ten provincial and three territorial
securities regulators. Its mission is to develop a national
regulatory system that fosters fair, efficient, and vibrant capital
markets in which investors are protected from unfair, improper
and fraudulent practices

 Self-regulatory organizations (SROs) are private industry

organizations to which the provincial regulatory bodies have
granted the privilege of regulating their own members. SROs
include the Investment Industry Regulatory Organization of
Canada (IIROC) and the Mutual Fund Dealers Association
(MFDA). If an SRO rule differs from a provincial rule, the more
stringent rule applies.

7. IIROC

 IIROC’s mandate is to “set high quality regulatory and investment

industry standards, protect investors, and strengthen market
 integrity while maintaining efficient and competitive capital
markets”

 IIROC is involved with financial compliance, business conduct

compliance, registration, enforcement and market surveillance

 IIROC’s market surveillance includes real time monitoring of

trading activity on stock exchanges, the Natural Gas Exchange, and
ATSs. It also ensures that dealer members comply with the timely
disclosure of information by publicly traded companies, and
carries out trading analysis and compliance with trading rules

8. INVESTORS PROTECTION FUNDS

 The Canadian Investor Protection Fund (CIPF) protects eligible

customers in the event of the insolvency of an IIROC dealer
member

 CIPF does not protect against “normal” market losses

 All accounts are covered, either as part of the customer’s general

account or as a separate account. Accounts such as cash, margin,
short sale, options, futures and foreign currency are combined
and treated as one account. Separate accounts, such as registered
accounts and trusts, receive separate coverage

 The maximum coverage is $1 million

 EXAMPLE: Mr. Huang has $500,000 in a Canadian dollar trading
account and $750,000 in an American dollar trading account. As
well, he has $450,000 in an RRSP Account. His maximum
protection under CIPF would be: $1,450,000. The trading
accounts would be “combined” to arrive at a total of $1,000,000 in
protection and his RRSP Account would receive up to an additional
$1,000,000 in protection.

INVESTOR PROTECTION FUNDS (Con’t)

 The Mutual Fund Dealers Association Investor Protection

Corporation (MFDA IPC) provides protection for eligible customers
of insolvent MFDA member firms. Coverage provided is limited to
$1,000,000 per customer account – similar to CIPF

 The Canada Deposit Insurance Corporation (CDIC) is a federal

Crown Corporation that provides deposit insurance. CDIC insures
eligible deposits up to $100,000 per depositor in each member
institution

 To be eligible for insurance, deposits must be held with a member

institution in Canadian currency and payable in Canada. Term
deposits must be repayable no later than five years from the date
of deposit
EXAMPLE: Assume that you have $80,000 cash on deposit in your name
and $120,000 on deposit in a RRSP. In the institution were to fail, CDIC
would insure up to $180,000: $80,000 is fully covered for the cash
deposit, and $100,000 of the $120,000 in the RRSP.

9. REGULATION & SUPERVISION

 Regulators have four primary objectives in imposing regulation:

1. Consumer protection
2. Fairness – markets must perceive that markets are fair
3. Economic stability – efficient flow of capital
4. Social objectives

 The Canadian securities industry follows a principles-based

regulatory model, rather than a rules-based model. Regulators set
objectives for securities dealers and allow the firms themselves to
decide how best to meet those objectives

 “Full, true and plain disclosure” of all pertinent facts is the general
principle underlying Canadian securities legislation

 Securities acts use three methods to protect investors:

1. Registration of securities dealers and advisors
 2. Disclosure of facts necessary to make reasoned
investment decisions
3. Enforcement of laws and policies

10. NATIONAL REGISTRATION DATABASE

 The National Registration Database (NRD) is a web-based system

to file registration forms electronically. It is designed to enable a
single electronic submission to satisfy all jurisdictions in Canada.
Both the IA and dealer member are required to notify the
applicable SROs in writing of any material changes in the original
answers to the questions on the NRD application (such as change
of address)

11. GATEKEEPERS

 Gatekeepers in the securities industry include dealers and all of

their employees, particularly in front line roles. A gatekeeper
must: Collect and record client information to identify potentially
suspicious clients; monitor activity in client accounts for possible
illegal transactions; and report any transactions or proposed
transactions in client accounts that are suspicious

 Money laundering, terrorist financing, financial fraud and illegal

trading are of particular concern to gatekeepers
 12. ETHICAL STANDARDS IN THE FINANCIAL
SERVICES INDUSTRY

 High ethical standards are of paramount importance. The

exchanges and the SROs have extensive rules and regulations that
govern trading on an exchange and industry practices in general.
Infractions may lead to fines, suspensions, expulsion and even
criminal charges

 Examples of unethical practices include: Deceiving the public

about the price or value of any security; Creating the misleading
appearance of active public trading to make a profit; Manipulating
or attempting to manipulate the market; Making a fictitious trade
that involves no change of beneficial ownership; Using high-
pressure or otherwise undesirable selling techniques; Violating
any statutes or laws; Misleading a client as to the risk involved in a
security; Trading in one’s own account before effecting the same
trade for a client (front-running); Conducting oneself in a way that
would bring the securities business, the exchange or IIROC into
disrepute

 All telemarketers must subscribe to the National Do Not Call List

(DNCL) which prohibit telemarketers from calling any number that
has been registered for more than 31 days