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TSX INC. NOTICE

APPROVAL OF AMENDMENTS TO THE RULES OF THE TORONTO STOCK EXCHANGE: PART 4, DIVISION 6 --

MARKET MAKERS

Introduction

In accordance with the Protocol for Commission Oversight of Toronto Stock Exchange Rule Proposals between the Ontario Securities Commission (OSC) and Toronto Stock Exchange (Protocol), TSX Inc. (TSX) has adopted and the OSC has approved certain amendments (Amendments) to the market making provisions in the Rules of the Toronto Stock Exchange (Rule Book). The Amendments will become effective on December 1, 2004.

Substance

The Amendments establish an additional method for a Market Maker Firm to allocate its assignments to another Market Maker Firm. Specifically, a Market Maker Firm will be able to: (i) exchange some or all of its securities of responsibility with another Market Maker Firm; or (ii) transfer all of its securities of responsibility to another Market Maker Firm in exchange for consideration if it is exiting the market making business.

In both instances, the recipient firm must produce a service level bid that is acceptable to TSX. In determining whether the proposed exchange or transfer is acceptable, TSX will take into account various considerations to be outlined in a Notice to Participating Organizations. TSX retains complete discretion in determining to whom an assignment will be transferred.

The Amendments also include other revisions that are not substantive.

Purpose

Many Participating Organizations intend to build market making as a viable component of their business operations. In order to do this, Market Maker Firms require the ability to transfer and exchange specific assignments with other Market Maker Firms in order to specialize and strengthen their strategic focus. The Amendments will facilitate the matching of securities assignments to Market Maker Firms that have skills and interest in a specific area. TSX believes that providing Market Maker Firms the flexibility to propose strategic transfers of assignments will result in Market Maker Firms that are internally focused on their market making duties.

The Amendments will also allow for the sale of a market making business by a Market Maker Firm that wants to exit the business. TSX believes that this change will bring certainty to Market Maker Firms who will be able to deal in a commercially reasonable manner with their market making business. The commercial flexibility that the Amendments will provide should result in Market Maker Firms that are internally focused on their market making duties.

We expect that the ultimate result of the Amendments will be that Market Maker Firms will be in a position to make significant contributions to market liquidity and market depth, as well as to moderate price volatility, thus improving market quality.

Non-Public Interest Rule

The Amendments are not considered to be a "public interest" rule. The Amendments merely change the process by which an assignment may be transferred from one qualified Market Maker to another. This is a procedural change rather than a substantive rule overhaul. The Amendments, which acknowledge the commercial aspect of the market making business, do not in any way affect the purpose or goals of the market making regime. TSX continues to be solely responsible for determining which Participating Organizations may perform market making functions.

Amendments

Part 4, Division 6 of the Rule Book Market Makers, is set out in Appendix A. The Amendments are underlined.

Timing

Because the Amendments are not considered to be a "public interest" rule, in accordance with the Protocol the Amendments were deemed to be approved by the OSC at the time TSX filed its Amendments submission on November 22, 2004. The Amendments will become effective on December 1, 2004.

 

APPENDIX A

1.
DIVISION 6 -- MARKET MAKERS
Division 6 -- MARKET MAKERS
 
4-601 Appointment of Market Makers
4-601 Appointment of Market Makers
 
(1)
In order to have a reasonable market quoted for each listed security, the Exchange may from time to time allocate to a Market Maker specified securities of responsibility.
(1)
General Principles
 
The primary responsibilities of Market Makers are to maintain a fair and orderly market in their securities of responsibility and generally to make a positive contribution to the functioning of the market. Each Market Maker must ensure that trading for the Market Maker's own account is reasonable under the circumstances, is consistent with just and equitable principles of trading, and is not detrimental to the integrity of the Exchange or the market.
 
(2)
Repeal proposed August 9, 2002 (pending regulatory approval)
(2)
Allocation of Securities
 
The Exchange shall assign securities of responsibility to Market Makers. Such assignment shall be made in accordance with criteria as described below and additional detail that may be set forth from time to time in notices to Participating Organizations. Since certain privileges are accorded to Market Makers, some securities may be regarded as desirable ones in which to have responsibility. Where two or more Market Makers are contending for assignment of responsibility, the Exchange shall make the determination.
 
There are two processes for allocating security assignments to Market Maker Firms: market-wide allocation assignments, and dealer-sponsored assignments. Under a market-wide allocation assignment, the Exchange publicizes the availability of an assignment of responsibility and then collects service level bids from interested Participating Organizations through a bidding process. Under a dealer-sponsored assignment, the Exchange receives a proposal from a Market Maker Firm to:
 
(i)
exchange one or more securities of responsibility with another Market Maker Firm; or
 
(ii)
transfer all of its securities of responsibility to another Market Maker Firm(s) in exchange for consideration if the Market Maker Firm is exiting the market making business.
 
The Exchange then collects a service level bid from the proposed Market Maker Firm. Under both assignment methods, the Exchange reviews the service level bid(s) in making its determination.
 
The Exchange categorizes listed securities according to "tiers" for certain purposes. These tiers are determined based on the level of trading activity in the securities. The two major tier categories are Tier A and Tier B. Securities that fall into the Tier A category are the most actively traded securities. Tier B covers securities that, on average, trade less actively. The Tiers are further divided into subtiers, again based on the level of trading activity.
 
Market Maker Firms are required to have a minimum number of security assignments as determined by the Exchange, which may be waived from time to time by the Exchange. Further, Market Maker Firms are required to maintain a minimum ratio of Tier B securities for each Tier A security that is assigned. The applicable ratio shall be adjusted periodically based on the ratio of the total number of Tier A securities to Tier B securities traded on the Exchange. Market Maker Firms are also not permitted to have greater than a specified percentage of security assignments within any given tier classification, unless otherwise permitted by the Exchange.
 
The Exchange retains the discretion to remove market making assignments, including, but not limited to, in circumstances where a Market Maker has been found to be non-compliant in accordance with Policy 4-607, and, in the case of a Market Maker Firm, where the Market Maker Firm undergoes a change in control.
 
(3)
Responsible Designated Traders
 
A Market Maker Firm is required to designate a Responsible Designated Trader within the firm for each security that has been assigned by the Exchange to such Market Maker Firm. The Market Maker Firm must provide the Exchange with the names of all Responsible Designated Traders and their security assignments, and forthwith advise the Exchange of any changes to such information. Notwithstanding the appointment of Responsible Designated Traders, the Market Maker Firm will continue to be responsible for the market making obligations relating to the securities assigned to the firm.
 
(4)
Temporary Assignments
 
On a periodic rotating basis (from month to month), Market Maker Firms are required to assume temporary responsibility for market making duties with respect to newly listed securities, and security assignments that have been discharged, until such time as those specific securities assigned to them on a temporary basis have been permanently assigned to a Market Maker.
 
4-602 Qualifications
4-602 Qualifications
 
(1)
No person shall be approved as a Market Maker unless such person has demonstrated market making experience that is acceptable to the Exchange.
(1)
Designated Market Maker Contact
 
(2)
No Participating Organization shall be approved as a Market Maker Firm unless the Participating Organization:
Market Maker Firms are required to have experienced personnel to effectively perform the market making assignments. In addition to appointing a Responsible Designated Trader for each security of responsibility, a Market Maker Firm must designate an individual within the firm to manage the firm's market making responsibilities and to be the primary contact with the Exchange with respect to the firm's market making assignments.
 
(a)
has provided sufficient trading desk and operations area support staff,
(2)
Capital Requirements
 
(b)
has installed a terminal acceptable to the Exchange that will permit it to properly carry out its market making responsibilities, and
Market Maker Firms are required to satisfy and maintain minimum capital requirements as determined by the Exchange from time to time, and shall notify the Exchange promptly in the event of a failure to meet such capital requirements. An example of the financial data that must be provided by a Market Maker Firm is set out in the form provided on the TSX website. The Exchange believes that it is paramount that Market Maker Firms have sufficient financial resources to effectively perform their market making responsibilities. Failure to satisfy the capital requirements may result in a reallocation of security assignments by the Exchange to another Market Maker.
 
(c)
satisfies the minimum capital requirements as determined by the Exchange in order for the Participating Organization to support its market making responsibilities.
 
Amended (April 3, 2000)
 
4-603 Failure to Obtain Approval
 
If an application for approval as a Market Maker is refused, no further application for the same person shall be considered within a period of 90 days after the date of refusal.
 
4-604 Responsibilities of Market Makers
4-604 Responsibilities of Market Makers
 
Market Makers shall trade on behalf of their own accounts to a reasonable degree under existing circumstances, particularly when there is a lack of price continuity and lack of depth in the market or a temporary disparity between supply and demand and in each of their securities of responsibility shall:
(1)
Assistance to Market Surveillance Officials and Participating Organizations
 
(a)
contribute to market liquidity and depth, and moderate price volatility;
Market Makers shall report forthwith any unusual situation, rumour, activity, price change or transaction in any of their securities of responsibility to a Market Surveillance Official. As much as possible, Market Makers shall assist Participating Organizations' traders by providing them with information regarding recent trading activity and interest in their securities of responsibility. They shall assist traders in matching offsetting orders. Based on their knowledge of current market conditions, Market Makers shall, on a best efforts basis, identify anomalies in Participating Organizations' orders in the Book and bring them to the attention of those Participating Organizations or to the Exchange.
 
(b)
maintain a continuous two-sided market within the spread goal for the security agreed upon with the Exchange;
(2)
Availability and Coverage
 
(c)
maintain a market for the security on the Exchange that is competitive with the market for the security on the other exchanges on which it trades;
Each Market Maker must ensure that its securities of responsibility are continuously monitored during the trading day. In this regard, Market Makers must have adequate back-up procedures and coverage by qualified individuals in cases of any absences due to illness, vacation or other reasons.
 
(d)
perform their duties in a manner that serves to uphold the integrity and reputation of the Exchange;
(3)
Maintenance of a Two-Sided Market
 
(e)
in the case of a Market Maker Firm, arrange for a back-up Responsible Designated Trader for each security assignment, and in the case of a Market Maker that is an Approved Trader, arrange for a back-up Market Maker, who in their absence, will carry out the responsibilities set out in this Rule;
Market Makers must call a continuous two-sided market in their securities of responsibility. In order to assist them in carrying out this responsibility, Market Makers are given certain privileges and are exempted pursuant to Rule 3.1 of UMIR from the short sale rule when carrying out their market making obligations.
 
(f)
guarantee fills for odd lot and mixed lot orders at the current board lot quotation;
1.
Spread Maintenance -- Market Makers shall maintain the spread goal agreed upon with the Exchange in each of their securities of responsibility on a time-weighted average basis. The Exchange monitors spreads on an ongoing basis, and assesses the performance of Market Makers on a monthly basis.
 
(g)
maintain the size of the Minimum Guaranteed Fill requirements agreed upon with the Exchange;
2.
Relief from Spread Goals - The initial establishment of a spread goal for a security is subject to negotiation between each Market Maker and the Exchange. The Market Maker shall notify the Exchange if the Market Maker is unable to maintain its spread goal. Any further changes to the spread goal are also subject to negotiation.
 
(h)
comply with the Minimum Guaranteed Fill requirements agreed upon with the Exchange, which include guaranteeing an automatic and immediate "one price" execution of MGF--eligible orders;
3.
Odd-lot Responsibilities -- General - Market Makers shall maintain an odd lot market at the board lot quotation.
 
(i)
be responsible for managing the opening of their securities of responsibility in accordance with Exchange Requirements and, if necessary, for opening those securities or, if appropriate, requesting that a Market Surveillance Official delay the opening;
Expiring Rights and Warrants -- Market Makers shall not be responsible for providing bids and offers for odd lots in rights and warrants within 10 days of the date of expiry of the right or warrant. If a Market Maker chooses to trade odd lots of such securities during this period, the Market Maker must do so at the board lot quotation unless prior consent of a Market Surveillance Official for a wider spread is obtained.
 
(j)
assume responsibility for certain additional listed securities in accordance with applicable Exchange Requirements;
Special Circumstances - The above exemption is also available in any securities that are affected by special circumstances relative to that security. If a Market Maker wishes to call an odd-lot market at a different price than the board lot market, the prior consent of a Market Surveillance Official must be obtained.
 
(k)
assist Participating Organizations in executing orders; and
4.
Relief from Responsibilities in Unusual Situations -- In extreme cases, such as illiquidity in a security on expiry of a take-over bid, a Market Surveillance Official may relieve a Market Maker from its responsibility to maintain a posted bid or offer. This exemption is also available when a Market Maker's obligation to post an offer would require it to assume or to increase a short position in a security that the Market Maker cannot reasonably be expected to cover because of the relative liquidity of that security or lack of securities available for borrowing.
 
(l)
assist the Exchange by providing information regarding recent trading activity and interest in their securities of responsibility.
5.
Client Priority and Frontrunning
 
Client Priority - The in-house client priority rule in UMIR Rule 5.3 requires Participating Organizations to execute their client orders ahead of any non-client orders at the same price. This rule applies to trading by Market Makers. Market Makers may participate in trading with one or more of their firm's client orders if the Participating Organization obtains the express consent of the client(s) involved.
 
Frontrunning Client Orders -- UMIR Rule 4.1 prohibits Participating Organizations, Approved Persons and persons associated with a Participating Organization from taking advantage of non-public material information concerning imminent transactions in equities, options or futures markets. Information about a trade is material if the trade would reasonably be expected to move the market in which the frontrunning trade is made. The frontrunning restrictions apply to Market Makers. Participating Organizations, Approved Persons and persons associated with a Participating Organization are prohibited from taking advantage of a client's order by trading ahead of it in the same or a related market. A trade made solely for the benefit of the client for whom the imminent transaction will be made, and a trade that is a bona fide hedge of a position that the Participating Organization has agreed to assume from a client, are exempt from the restrictions.
 
Frontrunning in Options and Futures - The restrictions further prohibit a frontrunning trade in the options or futures markets with knowledge of an imminent undisclosed material transaction in any of the equities, options or futures markets, including transactions by another Participating Organization. Again, a trade made solely for the benefit of the client for whom the imminent transaction will be made, and a trade that is a bona fide hedge of a position that the Participating Organization has assumed or agreed to assume from a client, are exempt from the restrictions.
 
Tipping and Trading Ahead - Participating Organizations and Approved Persons and persons associated with a Participating Organization are prohibited from tipping others about an imminent undisclosed material order to be executed for one of the firm' s clients in any market, including the equities market.
 
The Participating Organization executing the order may, however, contact the Market Maker to ask for assistance (for example, to ask if the Market Maker knows of Participating Organizations who may want to take the other side of the trade). If details of an imminent material trade in one of their securities of responsibility have been disclosed by another Participating Organization to the Market Maker, the Market Maker is prohibited from trading ahead of that order unless the Market Maker receives the express consent of the Participating Organization involved.
 
6.
Client-Principal Trading
 
Trades by Market Makers with clients of their Participating Organization, whether made pursuant to their market-making obligations or not, must comply with all UMIR Requirements governing client-principal trading.
 
4-605 Stabilizing Trades
4-605 Stabilizing Trades
 
(1)
In this Rule, "neutral trades" means trades that would otherwise be destabilizing trades except that:
(1)
Reporting and Performance Measurement
 
(a)
the Market Maker is unwinding a long or short position in a security taken previously;
In accordance with Rule 4-605(2), it is expected that at least 70% to 80% of Market Makers' trades in their securities of responsibility shall be stabilizing or neutral trades. Performance in this area will be measured periodically by the Exchange and reported to the Exchange. If 30% or more of a Market Maker's trades in their securities of responsibility are destabilizing trades, based on the number of transactions, share volume, dollar value of trading or any combination of those factors, the Market Maker's performance shall be considered unsatisfactory and the Market Maker may be subject to any of the penalties set out in this Policy.
 
(b)
the trade is made pursuant to the Market Maker's obligation to fill a MGF order;
(2)
Exemption for Certain Interlisted Securities
 
(c)
the trade is made pursuant to the Market Maker's obligation to maintain a specific maximum spread between bid and ask quotes; or
In order to encourage trading in certain interlisted securities on the Exchange, Market Makers shall be exempt from the stabilization requirements in dealing in all U.S.-based interlisted issues and in those Canadian-based interlisted issues in which more than 25% of the trading occurred on exchanges in the United States or on NASDAQ in the preceding year.
 
(d)
the trade is made for the purpose of maintaining a proportionate market (based on the conversion ratio) in a security that another security is convertible into or in the convertible security;
(3)
Application of Stabilization Requirement to Trading in Other Markets
 
provided that, in the case of the exceptions in (b), (c), and (d) above, the Market Maker is on the passive side of the trade.
The stabilization requirements apply to all trading by Market Makers in listed securities, whether on the Exchange or on another Canadian exchange. The exemptions contained in this Policy also apply to such trading.
 
(2)
At least 70% of Market Makers' trades in their securities of responsibility shall be stabilizing or neutral trades.
 
4-606 Market Makers Leaving Securities of Responsibility
4-606 Market Makers Leaving Securities of Responsibility
 
A Market Maker intending to relinquish one or more securities of responsibility shall provide the Exchange with at least 60 days' prior notice in such form as may be required by the Exchange, unless such notice period or part thereof is waived by the Exchange.
Pursuant to Rule 4-606, a Market Maker intending to relinquish one or more securities of responsibility shall provide the Exchange with at least 60 days' prior notice. For purposes of assessing the performance of a Market Maker Firm, scores of assignments relinquished with notice will be incorporated into the aggregate score of the firm.
 
Pursuant to Policy 4-601(4), a security assignment which has been relinquished may be assigned by the Exchange on a temporary basis to a Market Maker Firm pending permanent assignment.
 
Without restricting the generality of Rule 4-606, the Exchange will consider waiving the 60 day notice period, or part thereof, where securities of responsibility are being assigned under a dealer-sponsored assignment.
 
4-607 Assessment of Market Maker Performance
4-607 Assessment of Market Maker Performance
 
The Exchange shall review the approvals of all Market Makers at least once each calendar year and may review such approvals at other times.
(1)
Review of Performance
 
The performance of each Market Maker shall be periodically reviewed by the Exchange, as provided in Rule 4-607. The Exchange shall determine whether the Market Maker is adhering to Exchange Requirements and shall assess the degree to which the Market Maker had made a positive contribution to the market in its securities of responsibility over the period. In making this assessment, considerable weight shall be placed on the degree to which the Market Maker has:
 
(a)
maintained a two sided market in its securities of responsibility;
 
(b)
traded within the spread goals for its securities of responsibility;
 
(c)
traded actively in its securities of responsibility such that trading liquidity has been improved;
 
(d)
met such additional criteria as may be communicated by the Exchange.
 
(2)
Criteria for Review
 
The Exchange shall consider such performance or conduct unsatisfactory if the Market Maker has:
 
(a)
failed to meet the responsibilities set out in this Policy or to act in a manner that is consistent with the general intent of any of the Exchange Requirements relating to Market Makers; or
 
(b)
engaged in any conduct, manner of proceeding, or method of carrying on business that is unbecoming of a Market Maker, that is inconsistent with just and equitable principles of trade, or that is detrimental to the Exchange or the public.
 
(3)
Penalties for Non-Compliance
 
Following a determination that a Market Maker has failed to satisfactorily perform its market making obligations, the Exchange may recommend that:
 
(a)
a Market Maker's approval be suspended or revoked;
 
(b)
a Market Maker's responsibility for one or more securities be removed and those reassigned; and
 
(c)
an investigation into a Market Maker's trading or activities be carried out.
 
(d)
Repeal proposed August 9, 2002 (pending regulatory approval)
 
Prior to making any such recommendation, the Exchange shall notify the Market Maker of cases of non-performance or unsatisfactory conduct and shall provide the Market Maker with the opportunity to remedy such deficiency. However, if the Exchange reasonably believes that the non-compliance of a Market Maker has compromised the fairness and integrity of the market, the Exchange may, in its discretion, remove the market making assignments from that Market Maker without delay.