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Notice 2003-003 - Frequently Asked Questions

September 3, 2003


This notice is the first in a series of clarifications and interpretations of CNQ rules and CNQ Dealers� responsibilities under those rules. Traders should keep a copy of this notice under the �Notices� tab of the Trader�s Manual until the next update.

CNQ Rule 10-102(b): Prohibited Sales Practices

Concern has been expressed that this rule, which prohibits a CNQ dealer from �taking advantage� of a customer�s inability to reasonably protect his or her own interest, could impose a suitability obligation on a discount broker if the customer makes an unsuitable, but wholly self-directed trade.
The intent of the rule is to prohibit abusive sales practices that were used by broker-dealers (that were not SRO members) in the over-the-counter market. It does not create a suitability obligation where one does not otherwise exist.

Obligations of Market Makers Receiving Large Client Orders

Rule 4-114(1) obliges a Market Maker to obtain best execution for all client orders, including ones received from another dealer. Rule 1-106(2) deems a client who originates an order that is given to a Market Maker by another dealer to be a client of the Market Maker for the purposes of all applicable rules, including the Universal Market Integrity Rules.

Under UMIR Rule 6.3, a dealer must immediately expose or execute a client order unless one of the exceptions in Rule 6.3(1) apply. Two exceptions are for orders of more than 50 board lots or $100,000 in value, and situations where the trader makes a determination based on market conditions that entering the order is not in the best interests of the client. Therefore, the Market Maker is allowed to withhold an order in a bona fide attempt to get best execution for the client.

However, one of the criticisms of dealer markets is that traders who give orders to Market Makers are not able to see their orders and do not know if they have traded. If a Market Maker is not willing or able to execute the order immediately and does not believe that entering it immediately is in the best interest of the client, he should discuss with the trader giving him the order how it should be handled. It is appropriate for the trader at the other firm to give the Market Maker full discretion in handling the order, provided that the discretion is only exercised in the best interests of the client.

Questions on the CNQ rules should be directed to Timothy Baikie at 416-572-2000 x2282. Questions on UMIR should be directed to Market Regulation Services Inc. (James Twiss at 416.646.7277 or Michael Brady at 416.646.7280).