Canadian financial oversight framework evolves at a fast pace, reacting quickly to technological innovations. The country's regulator stands firmly as a protector of retail traders' interests, but as you will see below, that comes at a price to the very same traders.
Investment Industry Regulatory Organization of Canada (IIROC) overwatches the investment and trading industry and enforces rules that protect market participants' best interests in Canada. It is a self-regulating organization. The IIROC was created from the merger of two predecessor organizations — the Investment Dealers Association of Canada (IDA) and the Market Regulation Services Inc. (RS) in 2008. Before that, the IDA traced its history to 1916 while the RS was founded back in 2002. The IIROC acts under recognition orders from the Canadian Securities Administrators (CSA).
The IIROC has the following responsibilities in connection to its regulatory role in Canada:
- Create rules that enable high industry standards.
- Supervise investment advisors to ensure investor's security from unethical behavior and malpractice.
- Review registered firms to check proper capitalization.
- Monitor companies to confirm that proper risk management, account handling, KYC and AML procedures are in place.
- Analyze trading firms' trade-desk procedures for compliance.
- Investigate potential misconduct by market participants and exercise disciplinary proceedings.
Who should register?
The IIROC regulates all Canadian companies professionally engaged in the investment industry:
- Integrated companies (national firms engaged in proprietary trading, retail and institutional business, corporate finance, and research activities)
- Retail (mainly servicing individual retail clients)
- Introducing brokers (serving retail clients)
- Managed accounts
- Order-execution only (formerly known as discount brokers) — this is the category Canadian retail Forex brokers work under.
- Institutional investment companies
- Corporate finance companies (mostly engaged in distribution of securities and research)
- Alternative Trading Systems (ATS)
- Proprietary trading firms
Registration and compliance requirements
Forex brokers that wish to operate with retail traders in Canada have to fulfill the following conditions to get licensed by the IIROC:
- The company must be based in Canada.
- The application fee is C$25,000 (C$10,000 of which is non-refundable) + 0.5% of the "applicant's expected initial capital". Annual fee is no less than C$22,500 but depends on the dealer's revenue.
- The minimum required capital is C$250,000.
- The applicant must keep a well-organized system of books and records according to the accounting and audit standards.
- A broker should be properly insured. In case of a broker's bankruptcy, all traders' accounts are compensated up to C$1 million.
- A company is to have proper supervisory procedures in place to deal with its customers.
- A five-year business plan should be presented upon application to the IIROC.
- All executives, partners, and directors should be properly qualified and experienced; they have to attend a special course and pass an examination.
- The highest Forex leverage allowed in Canada is 1:50 (for USD/CAD; the maximum leverage is lower for other currency pairs).
- A regulated company must display on its website a 'regulated by' membership logo provided by the IIROC.
Powers at IIROC’s disposal
The powers of the IIROC when it comes to enforcement of its rule and general laws are as follows:
- Reprimand a member. In March 2010, the IIROC reprimanded the representative of CIBC World Markets for multiple violations, including a failure to give priority to clients' orders.
- Issue a fine up to C$5 million. A fine may also include associated costs and disgorgements of unlawful profits to affected parties. In March 2020, the IIROC fined TD Waterhouse Canada Inc. C$4,000,000 (plus C$28,497 in costs) for a failure to properly report retail traders' positions.
- Impose conditions on membership. In October 2020, the Organization imposed multiple conditions on Weekes family due to their breaches of regulations as investment advisors.
- Suspend a license. In August 2019, the IIROC suspended license of Dominick Capital Corporation due to deficiency in maintaining the necessary risk-adjusted capital.
- Expel a member. In case of extreme regulatory breaches, the IIROC may expel a member, revoking their license. For example, the regulatory organization expelled Octagon Capital in November 2020, terminating its license, after previously suspending it and following the company's bankruptcy.
The IIROC is at the head of a very complex regulatory system that spans multiple supervising bodies and state agencies. Its strictness is well-known to Canadian Forex traders, but the same strictness also appears to be limiting the options that retail traders can choose from when they decide to open an account. A similar situation is typical for the USA (CFTC and NFA) and Israel (ISA).
If you want to share your opinion, observations, conclusions, or to ask a question regarding the Investment Industry Regulatory Organization of Canada (IIROC), feel free to start a discussion on our Forex forum.
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