ATS Conflict of Interest Policies and Procedures
Table of Contents
- Policy Purpose
- Introduction to Coinsquare Dealer and Alternative Trading Platform
- Regulatory Background
- Conflict Identification and Management
- Identifying conflicts
- Fair access and pricing
- Physical and digital access separation
- Affiliate support services
- Confidentiality procedures
- Coinsquare Dealer trading for its own account
- Coinsquare Dealer trading for clients
- Supervision, Finance and Compliance Oversight
- Whistleblower Committee
- Personal dealings
- Gifts & Entertainment
- Availability of Coinsquare ATS’s Conflict of Interest Policies and Procedures
1. Policy Purpose
The Purpose of this policy (the “ATS Conflicts Policy”) is to inform clients and regulators alike as to how Coinsquare Capital Markets Ltd. (“CCML”) identifies and addresses potential conflicts of interest with respect to the alternative trading system (“ATS”) that it operates, in order to best serve CCML’s subscribers. This ATS Conflicts Policy will be available in the public domain, in accordance with subsection 10.1(e) of National Instrument 21-101 (“NI 21-101”), on the CCML website.
2. Introduction to Coinsquare Dealer and Alternative Trading Platform
CCML is a dealer member of the Investment Industry Regulatory Organization of Canada (“IIROC”) and also operates a marketplace that is an ATS. CCML is wholly owned by Coinsquare Ltd. (“Coinsquare”). As an IIROC member that operates as both a dealer (“Coinsquare Dealer”) and an ATS (“Coinsquare ATS”), CCML offers its dealer clients and ATS subscribers the ability to trade digital assets such as Bitcoin, Ether, and others (“Digital Assets”) that are purchased through a securities trading account whereby the accountholder does not hold the Digital Asset directly, but rather, has a contractual entitlement to receive such Digital Assets from the operator of the ATS.
As both a dealer member and marketplace member of IIROC, CCML is aware of, and recognizes the potential for actual or perceived conflicts of interest, and the potential negative effects of such conflicts, on subscribers, and more generally, on industry confidence. As such, in accordance with prudent business practices and applicable regulatory requirements, this document serves to identify potential and perceived conflicts of interest that may arise, and sets out policies and procedures for managing and/or avoiding such conflicts in the best interests of CCML’s clients.
3. Regulatory Background
Section 5.11 of NI 21-101 requires every Canadian marketplace to “establish, maintain and ensure compliance with policies and procedures that identify and manage any conflicts of interest arising from the operation of the marketplace or the services it provides.” In addition, subsection 5.12(b) of NI 21-101 provides that each marketplace that outsources to a third party any key service or system must “identify any conflicts of interest between the marketplace and the service provider to which key services or systems are outsourced, and establish and maintain policies and
procedures to mitigate and manage such conflicts of interest.” Moreover, certain provisions of the Companion Policy to NI 21-101 (“21-101CP”) provide guidance regarding a marketplace’s required conflicts management policies and procedures.
a. Coinsquare ATS does not provide inducements to Coinsquare Dealer
Subsection 7.8(2) of 21-101CP requires the following:
The marketplace’s policies should… take into account conflicts for owners that are marketplace participants. These may include inducements to send order flow to the marketplace to obtain a larger ownership position or to use the marketplace to trade against their clients’ order flow. These policies should be disclosed as provided in paragraph 10.1(e) of [NI 21-101].
While CCML’s owner, Coinsquare, is not itself a marketplace participant, Coinsquare ATS does not provide any inducements of any kind to Coinsquare Dealer, which is wholly and directly owned by Coinsquare. In particular, Coinsquare ATS does not provide inducements to Coinsquare Dealer to send order flow to Coinsquare ATS.
Although CCML is a subscriber to Coinsquare ATS, no advantages in pricing, access, information, or treatment are given to CCML in its capacity as a dealer participant over any non-affiliated subscriber. Safeguards have been implemented around intercompany dealings and sharing of confidential information. Tied selling is not allowed amongst the affiliated entities.
b. Coinsquare ATS does not engage in referral arrangements
Coinsquare ATS and Coinsquare Dealer do not engage with each other in referral arrangements, as defined in National Instrument 31-103 (“NI 31-103”) section 13.7 or elsewhere.
c. Other potential conflicts
Subsection 7.8(1) of 21-101CP notes that actual, potential, or perceived conflicts of interest may arise from the commercial interests of the marketplace, the interests of its owners or operators, including partners, directors, officers, or employees of the marketplace’s owners, or the responsibilities and sound functioning of the marketplace.
As such, all Coinsquare personnel, including the members of the Board of Directors, must disclose any outside activities to Compliance using the relevant Google Form. If the individual is registered, Compliance will make the appropriate filing to IIROC on NRD. Individuals are required to consider and address any existing or potential material conflicts of interest between the individual and Coinsquare and between the individual and Coinsquare’s client(s). If the issue cannot be addressed via written client consent or disclosure, the outside activity will be denied and must be avoided or discontinued.
CCML recognizes that carrying on a marketplace and a dealer business as divisions of the same corporate entity may be a source of confusion and perceived conflict and has addressed those conflicts through disclosure by CCML to its clients and through segregation of ATS personnel and trading information from client-facing dealer personnel. Another potential source of conflict is that CCML outsources key services from Coinsquare. Conflict-related risks are mitigated by the fact that the ultimate service providers operate at arm’s length to Coinsquare under written contracts that satisfy CCML outsourcing policies. In addition, Coinsquare Dealer may submit orders as principal to Coinsquare ATS in order to provide liquidity on the marketplace; however, any potential conflict is addressed through the automation of such principal orders and through physically separated and secured systems and storage areas that ensure that: (1) Coinsquare Dealer personnel responsible for such automated principal orders never have access to counterparty order or trade information, including in particular, information relating to retail client order flow reaching the Coinsquare ATS through Coinsquare Dealer; (2) all principal orders are priced independently of client orders; and (3) principal orders are not executed with any intent to take advantage of mispricing in the Coinsquare ATS.
CCML recognizes that conflicts may arise as the result of future business developments and/or regulatory changes. Consequently, this ATS Conflicts Policy may be amended from time to time to address such “new” conflicts.
- 1 At its launch, Coinsquare ATS will have only one subscriber, namely, Coinsquare Dealer. However, it is anticipated that Coinsquare ATS will eventually have other IIROC dealer member subscribers. This section of the ATS Conflicts Policy has been drafted with that circumstance in mind.
4. Conflict Identification and Management
CCML treats the management of all potential conflicts of interest seriously. CCML, therefore, operates its marketplace with an eye to maintaining a robust level of integrity. To do so, in keeping with NI 21-101, CCML operates its marketplace in a fair, orderly and transparent manner, addressing the following principles discussed in greater detail below:
- Identifying Conflicts
- Disclosure of Conflicts of Interest
- Avoiding or Addressing Conflicts of Interest in the Best Interests of Clients
- Ownership: Coinsquare
- Distinguishing Commercial Activity from Supervisory, Finance & Compliance Oversight
- Personal Dealings: Personal Trading, Outside Activities, Gifts & Entertainment
a. Identifying conflicts
Paramount in addressing conflicts of interest is proper identification of situations which may create conflicts. As a starting point, employees are advised to refer to CCML’s internal Code of Business Conduct and Ethics. CCML reviews potential conflicts of interest regularly, and at least annually, as part of the annual Compliance report to the Board of Directors.
At a minimum, whenever a new business line or relationship is considered, and whenever a director’s or senior officer’s participation on the board of, or as a senior officer of, another corporate entity creates any new potential, actual, or perceived conflict, the CCML Ultimate Designated Person (“UDP”) shall consider whether or not there is any actual material conflict of interest with CCML, any of its business units, affiliates, or clients. CCML’s Compliance department shall maintain a registry of all possible conflicts, and note how they were addressed, either by disclosure, avoidance, or otherwise and, as applicable, every activity outside of CCML by a CCML director, officer, or employee shall be disclosed to, and supervised by CCML’s Compliance department in accordance with the procedures described in the Outside Activities – Desk Procedure; and with respect to directors specifically, additional procedures shall apply in accordance with the Board of Directors Conflict of Interest Policy.
Specific to CCML’s operation of the Coinsquare ATS, and without limiting the application of other specific procedures set out elsewhere in this ATS Conflicts Policy or in other CCML written policy and procedure manuals, the following sets out the principles that govern CCML’s conflict identification and management protocols:
Coinsquare ATS’s priority is to provide a stable, fair, and orderly market with transparency of its rules and process. This aim must not be overridden by any commercial interests of either Coinsquare, its affiliates, any third-party outsourced service provider, or any business division of CCML, including its affiliate Coinsquare Dealer.
- Coinsquare ATS must make similar prioritization of the good of the marketplace and all subscribers, over commercial interests of any shareholder, affiliate, third-party outsourced service provider, or business division of the firm, such as the Coinsquare Dealer, when making regulatory, finance, supervisory, or compliance decisions.
- No CCML personnel, directors, or subscribers or other clients should attempt to inappropriately influence such decisions.
- Decisions should also be made in accordance with the letter and spirit of NI 21-101 and CCML’s policies and procedures.
- Personnel, directors and subscribers of Coinsquare ATS must maintain the confidentiality of Coinsquare ATS’s subscriber information, including order- and trade-related information.
Unless avoided, an existing or potential material conflict of interest must be disclosed to the client in all cases where a reasonable client would expect to be informed:
- for new clients, prior to opening an account for the client; and
- for existing clients, either as the conflict of interest occurs or, in the case of a transaction related conflict of interest, prior to entering into the transaction with the client.
As noted above, CCML is wholly owned by Coinsquare. However, the board of directors of CCML (the “Board”) shall meet the following terms and conditions at all times, unless staff of the relevant provincial securities regulatory authority (or authorities, as the case may be) expressly permit an alternative:
- the Board shall be comprised of more than 50% independent directors;
- the Chair of the Board shall be an independent director;
- the quorum for the Board shall consist of a majority of the Board members, with at least 50% of the majority being independent directors;
- for greater certainty, an individual is an independent director if the individual is “independent” within the meaning of section 1.4 of National Instrument 52-110 Audit Committees, as amended from time to time, but is not independent if the individual:
- is a shareholder that owns or controls, directly or indirectly, more than 5% of the shares of Coinsquare or CCML, or a partner, officer or employee of Coinsquare or CCML or an associate of that shareholder, partner, officer or employee,
- is a shareholder, partner, officer, director or employee of an affiliated entity of Coinsquare or CCML or an associate of that shareholder, partner, officer, director or employee;
- is a shareholder, partner, officer, director or employee of a person or company that owns or controls, directly or indirectly, more than 5% of the shares of Coinsquare or CCML,
- is a client or subscriber of CCML, or is a shareholder, partner, officer, director or employee of a client or subscriber of CCML who is responsible for or is actively engaged in the day-to-day operations or activities of that CCML client or subscriber
- is a director that was nominated, and as a result appointed or elected, by a founding shareholder or launch shareholder, or
- has, or has had, any relationship with a shareholder that owns or controls, directly or indirectly, more than 5% of the shares of Coinsquare or CCML that could, in the view of the Board, having regard to all relevant circumstances, be reasonably perceived to interfere with the exercise of his or her independent judgment as a director of CCML.
d. Fair access and pricing
Coinsquare ATS ensures that Coinsquare Dealer is aware of the conduct constraints imposed on an ATS by NI 21-101 and that no unfair or favorable treatment is given to Coinsquare Dealer as compared to other participants. Initially, Coinsquare Dealer will be the only participant.
All changes in fees require notice to, and approval by, the Ontario Securities Commission (the “OSC”), which is completed by way of filing (on Form 21-101F2) at least 15 business days prior to the intended implementation date of any such fee changes, except for any fee change that is considered a “Fee Change subject to Public Comment” (pursuant to subsection 2(d) of the Process for the Review and Approval of the Information Contained in Form 21-101F2 and the Exhibits Thereto, aka the “ATS Protocol”), in which case, the filing must be submitted at least 45 days prior to the intended implementation of such fee change.
e. Physical and digital access separation
Coinsquare ATS maintains the confidentiality of the information regarding the identity and trading activity of subscribers. Coinsquare ATS and Coinsquare Dealer are required to, at all times, maintain physically separated and secured systems and storage areas that are used to house and maintain client-related records, including, but not limited to order- and trade-data (“Subscriber Information”). System access controls ensure that only designated Coinsquare ATS technology personnel, as well as the Chief Financial Officer (“CFO”) and Chief Compliance Officer (“CCO”) and their delegates, have access to Subscriber Information. In particular, Subscriber Information is not shared with any affiliate or third-party service provider of CCML, except to the extent required for the affiliate or third-party service provider to carry out any key service or system that CCML has outsourced to it, in accordance with applicable laws and regulations, as well as with the confidentiality procedures referred to in paragraph (g) below.
f. Affiliate support services
Coinsquare ATS licenses a trading technology and surveillance technology platform from a third-party firm called Fundamental Interactions (“FI”) and shares some back office operational and technology support from its affiliate Coinsquare Ltd. Coinsquare ATS may also allow key members of personnel, including senior officers, to act in dual roles for the Coinsquare ATS, Coinsquare (the parent), and other affiliates, relating to human resources, legal, and administrative matters, pursuant to inter-company shared services arrangements. With the exception of information required to carry out such support services, Coinsquare ATS management and personnel do not have access to Coinsquare Dealer’s data.
g. Confidentiality procedures
All employees of CCML are required to follow the confidentiality procedures set out in CCML’s written policies and procedures. Compliance with these policies and procedures ensures that information is disclosed only on a “need-to-know” basis, and that subscriber identity and trading information is only released in accordance with Part 5 of NI 21-101.
h. Coinsquare Dealer trading for its own account
Section 10.1(e) of NI 21-101 and subsections 7.8(1) and (2) and 12.1(4) of 21-101CP set out certain requirements for owners (including partners, directors, officers, or employees of such owners) and affiliates of a marketplace to manage any conflict that may arise from their trading for their own account (i.e., on a principal basis) on the marketplace against or in competition with client orders.
Accordingly, Coinsquare ATS, in its Subscriber Agreement, discloses that:
- Separate and apart from Coinsquare ATS, CCML operates as a dealer that is approved as an IIROC Dealer Member, which membership is used to support the activities of both Coinsquare Dealer and Coinsquare ATS;
- Coinsquare Dealer may submit principal orders to Coinsquare ATS, which may coincidentally trade against or alongside orders from a subscriber other than CCML;
- CCML has in place policies and procedures that:
- ensure that Coinsquare Dealer: (a) when acting as a subscriber on Coinsquare ATS, abides by all relevant terms of the standard Subscriber Agreement that must be signed by all subscribers to Coinsquare ATS; and (b) discloses the corporate integration and shared IIROC membership of Coinsquare ATS and Coinsquare dealer on CCML’s website;
- allow CCML to manage potential conflicts of interest between Coinsquare ATS and Coinsquare Dealer, and any other business division or affiliate of CCML that may in the future act as a subscriber to Coinsquare ATS; and
- ensure that no preferential treatment is provided to Coinsquare Dealer or any other business division or affiliate of CCML with respect to access to Coinsquare ATS or any of the services it provides.
i. Coinsquare Dealer trading for clients
Coinsquare Dealer, as an IIROC dealer member firm, is subject to compliance examinations by IIROC, and must abide by client/principal trading requirements, which includes giving clients priority over principal trades, unless the client has given specific consent to trade alongside the principal order, in accordance with paragraph 2(c) of UMIR 2.1.
j. Supervision, Finance and Compliance Oversight
In order to preserve proper controls and oversight, including the mitigation and management of any conflicts of interest with CCML affiliates or third-party outsourced service providers, CCML has appropriate levels of supervision and oversight by means of a Supervisor, a CCO, a CFO, and a UDP, all of whom must be approved by IIROC and, if applicable, registered with the appropriate provincial securities regulatory authority in their respective categories, consistent with IIROC Rules and NI 31-103. CCML makes a clear distinction between supervision by and within the trading side, and compliance oversight by personnel outside the trading side of the firm.
The Supervisor is a trading business supervisor engaged in the daily flow of trading who has the means and authority to supervise the trading and other activities of personnel of CCML from a regulatory perspective. The Supervisor reports directly to the Chief Executive Officer (“CEO”).
The UDP is CCML’s CEO (both for Coinsquare ATS and Coinsquare Dealer) and has ultimate control and responsibility to ensure CCML operates in accordance with good governance principles, including confidentiality of information, managing conflicts of interest, and upholding relevant laws, regulations, and rules inside CCML.
The CCO must ensure compliance with IIROC Rules, as well as applicable provincial securities legislation. The CCO reports directly to the UDP on an ongoing basis, and provides a compliance report to the UDP and the Board of CCML at least annually.
The CCO for Coinsquare ATS is also the CCO for Coinsquare Dealer, which is consistent with section 5.2 of the Companion Policy to National Instrument 31-103 (“31-103CP”). This is fully disclosed to, and approved by, both IIROC and the OSC in the National Registration Database (“NRD”).
The CFO is charged with ensuring proper financial controls and oversight, and oversees the business with independence. The CFO must ensure compliance with IIROC financial requirements, as well as applicable legislation. The CFO reports directly to the UDP, and reports all appropriate financial issues directly to the UDP and the Board of CCML.
The CFO of Coinsquare ATS is also the CFO for Coinsquare Dealer, which is consistent with section 5.2 of 31-103CP, and this is fully disclosed to, and approved by, both IIROC and the OSC in the NRD.
k. Whistleblower Committee
CCML has created and shall permanently maintain a “whistleblower” program that contains reporting channels that are independent, broadly communicated and accessible to all employees and officers of the company (the “Internal Whistleblower Program”).
The Internal Whistleblower Program meets the following terms and conditions, failing which CCML shall immediately advise the Ontario Securities Commission and take appropriate measures to promptly remedy such failure:
- it reports directly to an independent committee of the Board (the “Independent Board Committee”),
- it includes protections from reprisal and mechanisms for anonymous reporting;
- the Independent Board Committee exercises oversight of the Internal Whistleblower Program and ensures that information being submitted is properly investigated and resolved, and
- the Independent Board Committee ensures that information received from the Internal Whistleblower Program is reported to the relevant provincial securities regulatory authority (or authorities, as the case may be), a recognized self-regulatory organization, or a law enforcement agency where appropriate or otherwise required by law.
Additional policies and procedures relating to the Independent Whistleblower Program are set out in a separate policy document (the Whistleblower Policies and Procedures).
l. Personal dealings
Coinsquare ATS employees are required to disclose and receive approval from the Supervisor for their personal trading, which may have the potential for a conflict of interest. This ensures that all personal trading which may pose a potential conflict of interest are identified and addressed or avoided. If the potential conflict is deemed material, and could result in damage to the interests of a subscriber, or is otherwise at odds with the overall principles of NI 21-101, Coinsquare ATS will take reasonable steps to resolve the conflict either by denying approval for the activity, or properly mitigating the potential conflict. Coinsquare ATS leverages an internal compliance system to register and address potential conflicts of interest. This includes:
i. Supervision of personal trading
All personal trading by employees of Coinsquare ATS must be disclosed to and pre-cleared by the CCO, in accordance with CCML’s Employee Trading Policy.
ii. Outside Activities
Outside Activities (“OAs”) include any employment, directorship, charity, or other activity by a registered Coinsquare ATS employee, independent contractor, officer, or director (board member) (each, a “Registered Person”), whether or not remunerated, including with regard to any Coinsquare corporate affiliate. Some OAs involve a potential interaction with a subscriber, which may give rise to an actual or perceived conflict, and in those cases, such OAs are generally prohibited. Some OAs, however, are permitted if they are separate from Coinsquare ATS and/or subscriber activity, and done outside of Coinsquare ATS’s hours of operation and premises.
In accordance with the Outside Activities – Desk Procedure, all OAs must be disclosed by a Registered Person to the CCO in the manner prescribed by the Outside Activities – Desk Procedure, which shall be delivered by the completion and submission of the OBA Google Form, the content of which shall be sent to compliance via the Google Form submission which shall populate the Google Sheet.
Compliance shall review and, where appropriate, ensure that appropriate approval (or denial) of the OA is granted, and that it is adequately documented on the Google Sheet. If necessary, the material conflict would be disclosed to clients on the CCML website in the Relationship Disclosure Document.
m. Gifts & Entertainment
Entertainment of, or by subscribers of Coinsquare ATS must not be excessive, or be seen to unduly influence any parties. Gifts received or given must be disclosed to the CCO to ensure they are only nominal in value and frequency. On an annual basis, no one person should receive more than CAD $800 in gifts. Additional policies and procedures concerning gifts and entertainment are set out in other CCML policies and procedures. Any questions about this Gifts & Entertainment policy should be directed to the CCO.
5. Availability of Coinsquare ATS’s Conflict of Interest Policies and Procedures
This document is available to all employees and officers of CCML. In accordance with NI 21-101, it is also found on the CCML website at: www.coinsquare.com.
For any inquiries, please contact the CCO of CCML.