RS and Market Surveillance Rotman School of Business October 13, 2005

1. RS and Market Surveillance Rotman School of Business October 13, 2005

2. Universal Market Integrity Rules (UMIR) • Common set of rules that govern equities trading in Canada • Prevention of violations • Powers of enforcement

3. Our History • Began on March 1, 2002 • Prior to RS, exchanges regulated themselves • Two major changes in exchange structure: • Demutualization of the Toronto Stock Exchange, that bought junior exchange • Emergence of Alternative Trading System

4. Not-for-profit Self-Regulatory Organization • Revenues: regulation fees charged to Participant Organizations and from marketplaces • Toronto and Vancouver

5. Securities Regulation in Canada Recognizing Commissions Delegated powers under securities legislations and recognition orders Exchanges and ATSs SROs Market Regulation MX NasdaqCanada TSX MFDA (BC, AB, SK, ON) IDA (BC, AB, SK, ON, QB) RS (BC, AB, MB, ON, PQ ) TSX Venture CNQ Trade Association Member Regulation Bloomberg Tradebook Canada CIPF MSI

6. RS – Operations Complaints Closed Trading Review & Analysis Market Supervision Enforcement Action Preliminary Investigation Real-Time Market Monitoring Investigation Trade Desk Reviews Securities Acts and other Regulatory Violations By Non-Regulated Person Referred to Provincial Securities Commissions and/or Self-Regulatory Organizations Closed

7. Surveillance Functions • Administering Timely Disclosure Policy • Reviewing Trading Patterns • Forwarding suspect trading situations for investigation • Reversing trades where necessary

8. Timely Disclosure • Equal access to accurate and timely information for all • Notified prior to release of all material news items (i.e. stock splits, major acquisitions, take-over bids, large equity financings) • Decision made whether or not to halt trading • Listed company releases news to full-text wire service

9. Trading Volumes • 34 million transactions • 60 billion shares traded • $705 billion in value

10. Trade Desk Reviews • On-site Compliance Audits • TSX & TSXV firms • Universal Market Integrity Rules • Supervision Policy

11. Market Supervision Investing Public Participating Organizations Other Exchanges and Commissions Listed Companies TSX/TSXV departments/divisions Trading Review & Analysis

12. Types of Investigations • Insider Trading • Manipulative Trading • includes high closing • Trading Infractions • Complaints

13. Investigations • Contraventions of Universal Market Integrity Rules/Market Specific Rules • Joint investigations with the IDA/Commissions/Police

14. Enforcement - Sanctions • New Sanction Guidelines introduced – September 25, 2002 • Reprimand • Fine - maximum • Suspension or restriction of access • Impositions of any terms and conditions (e.g., further training) • Revocation of access • Interim orders

15. Alliances • Securities Enforcement Review Committee (SERC) • Joint Agency Intelligence Liaison Committee (JAIL) • Integrated Market Enforcement Teams (IMET) • Criminal Intelligence Services - Ontario (CISO) • Inter-Market Surveillance Group (ISG)

16. New Initiatives • Focus on Risk • Strategic Review of UMIR • Data Mining • Post-Trade Analytics • TREATS (electronic audit trail)

17. Market Surveillance

18. Real Time Investor Protection • Our Key Processes: • Administration of timely disclosure policy (Issuer Regulation) • Reviewing trading patterns (Investor Regulation) • Outcome: • Forwarding suspect trading situations to Investigations & Analysis

19. Timely Disclosure • Cornerstone policy of TSX • Equal access to information for all • Deals with material news items (i.e. stock splits, major acquisitions, take-over bids, large equity financings)

20. Timely Disclosure • Policy covers material disclosure but process includes all disclosure by press release • Pre-notification to RS, followed by draft • Feedback from RS • Coordination of trading halts • Monitoring for dissemination including indicated opening price • Resumption of trading

21. Disclosure Problems • Selective disclosure • Failure to advise Market Surveillance • Delaying press releases or not disclosing negative news • Inability to reach senior officials • Press releases issued by third party (Investor Relations)

22. Monitoring the Market • Market monitored on an on-line basis throughout the day • Statistical and rule-based alerts • Access to Trading Engine • Other internal and external databases

23. Monitoring the Market Statistical alerts • Primarily for disclosure problems and illegal insider trading • Up to 16 algorithms • Price/volume exceptions, inter and intra-day, trade gap • Order rate and trade rate

24. Monitoring the Market Rule-Based alerts • Primarily to enforce UMIR (Trading) Rules • Market Stabilization • Customer Principal Trading • Order Markers • Specialty Trades • Front running

25. Referrals to Investigations & Analysis • Possible insider trading • Manipulation incl. high/low closing, spoofing • Specific trading rule violations incl. front running, illegal short sale, CPT, market stabilization, best execution, client priority

26. Market Surveillance Software IMM - Intelligent Market Monitor - Alerts

27. Market Surveillance Software IMM - Alert Details

28. Market Surveillance Software – External Vendor- Newsedge

29. Market Surveillance Software MaDCAT-Market Data Collection & Analysis Tool

30. Market Surveillance Software – External-Internet

31. Market Surveillance Software Confidential Previous Trades Display

32. Market Surveillance Software Consolidated Short Position Report

33. Market Surveillance Software ROC - Record Of Contact

34. Market Surveillance Software SMARS Rule Based Alerts – Market Stabilization Monitor

35. Market Surveillance Software – External- earnings estimates

36. Conclusion Questions?