Transcription

Introducing and Carrying Broker DepositIndustry Best Practices:Operationalizing the Legal Entity Identifier (LEI)Date:19 February 2021Document: 20210219-7 (ENG)Status:Published

Preamble The Introducing and Carrying Broker Deposit Industry Best Practices:Operationalizing the Legal Entity Identifier have been developed by the BrokeredDeposit Advisory Group (BDAG) to support the adoption of a consistent industryapproach to optimize deposit insurance coverage for clients of introducing brokerswho place deposits through carrying brokers. The Best Practices focus on the operationalization of key standards and parametersthat Introducing Brokers (IBs), Carrying Brokers (CBs) and CDIC member institutions(MIs) must follow to ensure coverage for deposits placed for the clients of IBs,including how the Legal Entity Identifier (LEI) is to be used to ensure depositinsurance protection for deposits held at CDIC member institution. The Best Practices also set out several examples that explain how the LEI is to beused and applied in different deposit scenarios. The standards and parameters compliment and support key legislative requirementset out by the Government of Canada. They should be implemented by stakeholdersin conjunction with the CDIC Act and the CDIC Co-Owned and Trust DepositDisclosure By-law (COTDB) [Effective as of April 30, 2022]. Note: For reading ease, this document uses IIROC terminologies of Carrying Broker,Introducing Broker and Portfolio Manager. However, the concepts and examplesprovided are relevant to MFDA dealers, intermediaries and nominees and MFDAmembers should replace Carrying Broker and Introducing Broker with CarryingDealer and Introducing Dealer, respectively. Also, please note that for the purposesof this document, any reference to “introducing broker (IB)” should be read to include“portfolio managers”.1

ContentsPreamble . 11.Introduction . 41.1Amendments to the CDIC Act . 41.2CDIC Act Amendments: Impact on Carrying Broker as Nominee Depositor (CurrentIndustry Structure) . 41.3CDIC Act Amendments: Future Industry Structure (post April 30, 2022) to EnhanceCDIC Coverage . 52.3.Industry Best Practices: Operationalizing the LEI . 82.1Purpose of LEI Industry Best Practices . 82.2LEI Target Audience . 82.3What is a Legal Entity Identifier (LEI)? . 92.4Why is the LEI important? . 92.5LEI Transmission Flow . 102.6Requirements for Existing and New Deposits . 112.7Benefits of a Standardized Approach for LEI . 11LEI Key Standards and Parameters . 123.13.1.1Acceptable Legal Entity Identifier (LEI) . 123.1.2How to obtain a Legal Entity Identifier (LEI)? . 123.1.3Legal Entity Identifier (LEI) Format . 133.24.LEI Standards . 12LEI Parameters . 143.2.1Legal Entity Identifier (LEI) Function . 143.2.2Parameters for using the Legal Entity Identifier (LEI)? . 153.2.3LEI Link to Deposits and Nominee Broker under an Association of Persons. 163.2.4Amending Legal Entity Identifier (LEI) . 17Roles and Responsibilities . 184.1Context . 184.2Introducing Broker and Portfolio Manager . 184.3Carrying Broker . 184.4Platform Partners – Fundserv and CANNEX . 194.5Member Institution (MI). 194.6CDIC . 192

5.6.LEI Lifecycle within the Investment Industry. 215.1Key Platforms. 215.2Fundserv . 215.2CANNEX . 225.3Manual . 22LEI Application: Key Examples - Non-Registered Deposits . 236.1Non-Registered Deposits . 236.2Example A: One Client/One Deposit . 246.3Example B: One Client/Multiple Deposits same Introducing Broker/Portfolio Manager256.4Example C: One Client/Multiple Deposits different Introducing Broker/PortfolioManager . 276.5Example D: One Client/Multiple Deposits different Introducing Dealer. 286.5Example D: One Deposit/Multiple Clients . 306.7Example E: Multiple Deposits/Multiple Clients same Introducing Broker/PortfolioManager . 326.8Example F: Multiple Deposits/Multiple Clients different Introducing Broker/PortfolioManager . 337.6.9Example G: Co-owned Deposits . 346.10Example H: Nested Trust Deposit . 35LEI Application: Key Examples – Registered Deposits (same UCI) . 367.1Approach . 367.2Application of LEIs for Registered Deposits. 367.3Example I: Registered Plans (RRSP) . 377.4Example J: Registered Plans (RESP) . 387.5Example K: Registered Plans (Multiple RESP) . 407.6Example L: Registered Plans (RDSP) . 42Acronyms and Abbreviations . 44Glossary of Terms & Concepts . 453

1.Introduction1.1Amendments to the CDIC Act In 2018, the Government of Canada made amendments to the CDIC Act tostrengthen deposit insurance protection for brokered deposits held in nomineename (nominee brokered deposits). The changes include enhanced requirements that nominee brokers must meet toensure the deposits held for clients at CDIC Member Institutions (MIs) are protected. The requirements are effective April 30, 2022 and are not discretionary: they applyto all nominee brokered deposits, including existing deposit and net new deposits.1.2 CDIC Act Amendments: Impact on Carrying Broker as NomineeDepositor (Current Industry Structure) New provisions in the CDIC Act requires brokers to assign unique client identifiers(UCIs) for each client for whom they place a deposit in nominee name. -to-deposit-insurance-affecting-nominee-brokers/ UCIs for clients must be assigned by the nominee broker registered as the nomineewith the MI and transmit the UCI for inclusion on the MI’s records each time adeposit is made and each time a deposit is changed. Currently, the CB is identified as the nominee broker (NB); the MI records do notidentify the IB in any way, therefore play no role in how deposit insurance iscalculated in relation to the nominee relationship. UCIs assigned by CB must be the same for the same client regardless of whether thedeposit stems from different IBs; therefore, the CB must identify the sameunderlying client across all other legal entities (i.e. introducing brokers) to ensureUCIs are assigned correctly. CDIC would be required to aggregate all deposits placed by a CB (the trustee) for thesame beneficiary (the client of IB(s)) to determine deposit insurance protection,even if deposits were sourced through different IBs (see diagram below).4

MemberInstitutionNomineeDepositorof recordCarrying Broker(Nominee Broker)IntroducingBroker (asClient agent)IntroducingBroker (asClient agent)Client A(UCI: 123)Client B(UCI: ABC)Client A(UCI: 123)Client B(UCI: ABC)Client UCI must be the sameNote: Aggregation would be based on the same UCI assigned by the CB.1.3 CDIC Act Amendments: Future Industry Structure (post April 30, 2022)to Enhance CDIC Coverage Through BDAG, industry has developed an approach that looks to optimize depositinsurance protection by recognizing the unique IB and CB relationship in placingclient deposits at CDIC member institutions. Industry’s approach focuses on the concept that that the CB and their related IBs canbe deemed to be an “association of persons” who places clients’ deposits with MIs The “association of persons” formed between the CB and IB, and the MI are the“parties to an arrangement” under the definition of Nominee Broker for thenominee deposits placed at MIs on behalf of the mutual client of the CB and IB5

The “association of persons”, could be seen as a separate person under the CDIC Actand would be the Nominee Broker/depositor placing the deposit with the MI;contractually the CB would remain the counterparty with the MI for the placementof the deposit Conceptually, under this structure, deposit insurance protection could be based onthe aggregation of all deposits placed by a NB (the unique CB/IB unit) for the samebeneficiary (the client), even if deposits were sourced through different IBsCounterpartyMember InstitutionNominee Broker 1Carrying BrokerClient ACounterpartyIntroducing Broker 1Nominee Broker 2Carrying BrokerClient AClient BCB with each IB form aunique NB based on aunique association ofpersonsIntroducing Broker 2Client BClient UCI can be differentNote: Aggregation would be based on the different UCI assigned by the CB/IB.6

1.4Key Elements of the Conceptual Approach The approach developed the industry presumes that “Nominee Broker”, as itpertains to the CDIC Act, can be achieved through an “association of persons”. CDIC has indicated that this is permissible under the Act so long as key conditionsare met, including: adequate information is transmitted to the CDIC MI such that the“association of persons” is recorded and identifiable on the MI’s records, andcan be transmitted to CDIC the relationship that forms the “association of persons” is set out in thelegal/contractual documentation between the nominee broker (i.e. CB andIB) and the CDIC MI the “association of persons” formed through the contractual relationshipbetween the IB, CB and MI continue to meet other requirements (i.e. IIROCand MFDA rules) These Best Practices look to address the operation elements that will support thetransmission of information required to identify the “association of persons” on therecords of the MI for deposit insurance purposes Best practices related to the required contractual/legal elements of theapproach are addressed through a different set of industry best practices. To do so, the industry will look to leverage the Legal Entity Identifier (LEI), anidentifier widely accepted and used by broker/dealers in Canada, as the key piece ofinformation to be transmitted to identify the association of persons for a depositplaced at a CDIC MI under a IB/CB relationship7

2.Industry Best Practices: Operationalizing the LEI2.1Purpose of LEI Industry Best Practices The LEI Industry Best Practices build on the industry approach noted above and setout industry expectations about the LEI design, application and transmission. The LEI Industry Best Practices apply to nominee brokered deposits situations wherean association of persons (i.e. between two legal entities) exists between anintroducing entity and a carrying entity; it does not apply to nominee brokereddeposits not held through an association of persons (i.e. placed directly by a broker)or to brokered deposits placed in client name. These Best Practices form the basis for nominee brokers under an association ofpersons (i.e. carrying broker for their introducing brokers), CDIC MIs and allintermediaries involved in the brokered deposit process to implement system andprocedural changes required to support the proper transmission and retention ofLEIs and facilitate broker and MI disclosure of these LEIs to CDIC when required.2.2 LEI Target AudienceThe LEI Industry Best Practices apply to all organizations that play a role in nomineebrokered deposit held through an association of persons and are involved in theprocess for placing client funds in deposit products held at CDIC MIs, including:Carrying Brokerage firmsIntroducing Broker and Portfolio Manager firmsCDIC MIsData Service Providers that support carrying brokerage firms and MIsFinancial exchange platformsRelevant regulatory bodies (federal or provincial) Other organizations that deal in nominee brokered deposits such as mutual fundcompanies, insurance companies, etc. 8

2.3What is a Legal Entity Identifier (LEI)? The LEI is a unique, 20-character alphanumeric code based on the ISO 17442standard, which is assigned to legal entities that are counterparties to financialtransactions. The LEI links back to a data set of critical information about thetransacting entity, including ultimate entity ownership. The Global Legal Entity Identifier Federation (GLEIF) is a not-for-profit organizationestablished to support the implementation and use of the LEI. The GLEIF manages anetwork of partners, LEI issuing organizations, to provide trusted services and open,reliable data for unique legal entity identification worldwide. Each LEI code is assigned by an approved local operating unit (LOU) of the GLEIF,which benefits from local knowledge of infrastructure, corporate organizationalframeworks and business practices.2.4Why is the LEI important? In relation with the CDIC Act and associated By-laws (COTDB), the LEI will be used insituation where the “Nominee Broker” is achieved through an “associatedpersons”—notable when there is a carrying and introducing entity involved inplacing a deposit with an CDIC MI. An association of person would apply when the broker/dealer is a Carrying Broker(CB) or carrying dealer or intermediary carrying an Introducing Broker (IB) orintroducing dealer or Portfolio Manager (PM). It is important to note the associated persons with the Carrying Broker canonly be formed under a contractual arrangement between legal entitiesregistered under a Canadian Self-Regulatory Organization (SRO), such asIIROC or MFDA, or under a provincial securities commission. To facilitate the transmission of information regarding the relationship between theCB and IB, industry proposes the transmission of the Legal Entity Identifier (LEI) ofthe introducing entity. This will require the MI and the association of persons toagree to the use of the LEI as part of the distribution agreement, in lieu of anotheridentifier of the introducing entity (i.e. legal name and address). Industry believes by using the LEI over other identifiers provided several benefitsincluding the following:9

The LEI once issued for a company, regardless of any name change and/oraddress, remains in perpetuity The LEI is internationally unique and provides greater consistency across theindustry The LEI links back to a generally available database that includes accurateand consistent demographic information about the IBIt is key that the LEI be applied, transmitted and recorded correctly as informationabout the associated party of the nominee brokered deposits flows frombroker/dealer/intermediary to MI to CDIC (see LEI Transmission Flow schematicbelow). 2.5LEI Transmission FlowAssociation of PersonsIntroducingBrokerorPortfolioManagerNominee Broker underan Association ofPersons transmit the LEIas a supplemental fieldat the time the depositCarryingBrokerCDIC requests ClientInfo linked to LEI(Name, address, etc.)Nominee Brokerunder an associationof persons provideall requiredinformation underthe CDIC Act within3 business daysMI notify NomineeBroker of the LEI ontheir book of recordwhen received byan association ofpersonsMemberInstitutionCDICMI transmit DSR Extract with LEI whenprovided by the Nominee Broker operatingunder an association of persons10

2.6Requirements for Existing and New Deposits Similar to the requirements for the UCI, to ensure that deposits placed under anintroducing/carrying entity relationship are protected under the new approach, theLEI will need to be transmitted for each nominee deposits placed by carrying brokersthat are already on the books of CDIC MIs as of the coming into force of the newrequirements on April 30, 2022 (i.e. existing deposits), as well as for net-newdeposits placed at CDIC MIs subsequent to the coming into force date. For clarity, this includes: Transmitting LEIs for all nominee brokered deposits placed under theintroducer/carrier association of persons deposits held for clients at an MI onthe day the new requirements come into force (i.e., existing deposits), and Providing LEIs for any new deposits placed for clients by nominee brokerunder an association of persons as of the day the new requirements comeinto force (i.e., net new deposits) Failure to properly assign LEIs for existing or new deposits placed under an IB/CBassociation could result in limiting deposit insurance protection for clients’ depositsat CDIC MIs.2.7Benefits of a Standardized Approach for LEI The use of a LEI in transaction reporting improves the quality of financial data acrossthe industry, allows for improved market surveillance and increases transparencyamongst parties involved. Benefits to the financial industry resulting from the use ofLEIs are clear, encouraging regulators worldwide to quickly adopt rules that arerequiring entities to include LEIs in transaction reporting. Benefits for the registration of a LEI: Adherence to growing regulations whereby LEIs are used to identify partiesin a transaction; Improved communications and recognition between entities by the use of acommon language understood globally; Reduced risk resulting from incorrectly identified entities; Valuable risk management tool making the management of financialtransactions more efficient.11

3.LEI Key Standards and Parameters3.1LEI Standards3.1.1 Acceptable Legal Entity Identifier (LEI) The LEI is a unique, 20-character alphanumeric code based on the ISO 17442standard. Only organizations duly accredited by the Global Legal Entity Identifier Foundation(GLEIF) are authorized to issue LEIs. Accreditation is the process by which GLEIFevaluates the suitability of organizations seeking to operate within the Global LEISystem as LEI issuers. Each LEI code is assigned by an approved local operating unit (LOU), which benefitsfrom local knowledge of infrastructure, corporate organizational frameworks andbusiness practices.3.1.2 How to obtain a Legal Entity Identifier (LEI)? To obtain a LEI, the legal entity needs to reach out to a LEI issuer, which are referredas Local Operating Unit (LOU), who supply registration, renewal and other services,and act as the primary interface for legal entity wishing to obtain an LEI. A list of LOU can be found on the Global Legal Entity Identifier Foundation (GLEIF)website (https://www.gleif.org/en/). Once a legal entity as identified a LOU the following diagram explain the workflow toobtain a valid LEI:12

As a refence, the below are pricings in effect (as of July 2020) for issuance and/orrenewal of the LEI by a Canadian LOU. Please note that pricing is managed by theLOUs and may be subject to change at any time without notice. Renewal/Maintenance (as of August 2020)- 1-year renewal – LEI renewal for 1 year: C 105 (C 105/year)- 3-year renewal – LEI renewal for 1 year 2 annual renewals: C 291 (C 97/year)- 5-year renewal – LEI renewal for 1 year 4 annual renewals: C 435 (C 87/year)3.1.3 Legal Entity Identifier (LEI) Format The LEI Code has been defined and specified in the International Standard ISO17442, issued on June 1st, 2016. The code consists of 20 characters (digits and uppercase letters A-Z): Four digits to identify the LOU (Local Operating Unit) that issued the LEI Two reserved characters Twelve digits that identify the legal entity Two checksum characters The following diagram depicts the structure of the LEI Code:13

The Standard requests the LEI Data Record to contain, at a minimum, the followingreference data for each LEI Code: The official name of the legal entity as recorded in the respective officialbusiness registry The registered address of the headquarters of the legal entity The address and the country of the legal formation (encoded according to theISO 3166 standard) The date of the first LEI code assignment The date of the last update of the LEI reference data The Global Legal Entity Identifier Foundation (GLEIF) lists four fundamentalprinciples that underlie the structure of a LEI: 3.2Globality – The global scope of the standardUniqueness – a single, unique identifier is assigned to each legal entityData Quality – the standard is supported by high-quality dataFree Availability – the standard is a public good, available free-of-charge to allusersLEI Parameters3.2.1 Legal Entity Identifier (LEI) Function The primary function of the LEI is to represent the Introducing Broker or PortfolioManager as part of the association of persons with the Carrying Broker on therecords of the MI and to CDIC.14

The LEI must be sent with each nominee brokered deposit transaction whenever aNominee Broker is composed by an association of persons between a CarryingBroker and an Introducing Broker or Portfolio Manager firm. The LEI must not be used when the Nominee Broker is a sole Broker (i.e. the depositdoes not extend from an IB/CB association of persons).3.2.2 Parameters for using the Legal Entity Identifier (LEI)? As per the GLIEF standards, the LEI must meet the following criteria for transmissionfor nominee brokered deposits: The LEI was assigned from the public domain which adhere to the 20characters, alpha-numeric, code based on the ISO 17442 standard developedby the International Organization for Standardization (ISO); The LEI is used in a context of associated person under an operational modelof a carrying broker; The LEI represents the introducing broker or portfolio manager that is part ofthe associated person with the carrying broker; The introducing broker or portfolio manager is registered under a CanadianSelf-Regulated Organization (i.e. IIROC or MFDA) or under a provincialsecurities commission; If one or more criteria above are not met, then the LEI should not be used in anycontext related to CDIC by-laws for deposit coverage. The following examples illustrate the above guiding principles when to populate ornot the LEI:Example AContext – A Broker/Dealer is registered under an SRO (i.e. IIROC or MFDA) and isparty to an agreement with a MI to place deposit for clients in nominee name. Aclient of this Broker/Dealer is a corporation, legal entity on its own, who use theservice of the Broker/Dealer for investments and deposits purposes.Question 1 – Does a LEI need to be transmitted for the purposed of extendingdeposit insurance protection?Response – No, a LEI is not required as the Nominee Broker in this case is not anassociation of persons (i.e. the deposit does not stem from a IB/CB relationship).15

Question 2 – should a LEI be assigned for the corporation who is a client of thenominee broker?No. A LEI needs only be provided for an introducing entity who together with thecarrying entity forms the association of person that are the nominee broker. Inthis case, the corporate client is the beneficiary of the deposit and should beassigned a UCI.Example BContext – A Broker/Dealer is registered under IIROC or MFDA (SRO) as a CarryingBroker (CB). Their client firm is an Introducing Broker (IB) registered as suchunder IIROC or MFDA. The IB service their clients for investments and depositsneeds.Question – Will a LEI be required or permissible to use in this case in relation forCDIC deposit coverage?Response – Yes, a LEI is required as the Nominee Broker in this case is anassociation of persons between the CB and IB. Additionally, the association ofpersons in this case qualify for all criteria.Example CContext – A Broker is registered under IIROC (SRO) as a Carrying Broker (CB).Their client firm is a Portfolio Manager registered under a provincial securitiescommission. The PM service their clients for investments and deposits needs.Question – Will a LEI be required or permissible to use in this case in relation forCDIC deposit coverage?Response – Yes, a LEI is required as the Nominee Broker in this case is anassociation of persons between the CB and PM. Additionally, the association ofpersons in this case qualify for all criteria.3.2.3 LEI Link to Deposits and Nominee Broker under an Association ofPersons To ensure alignment of nominee broker, operating as an association of persons, andCDIC Member Institution (MI) records, a LEI must be assigned to the associated partysuch as the Introducing Broker (IB) or Portfolio Manager (PM) and transmitted to aMI if it is linked to deposit positions at a CDIC MI.16

When a LEI is issued for an associated party such as an IB or PM, the LEI must belinked to the required firm information (i.e. names, addresses, etc.) in the records/systems of the Carrying Broker (CB) and must be kept up to date. The LEI must be transmitted through the appropriate channel (CANNEX, FundServ;Manual forms) with each nominee brokered deposit transaction at the time thetransaction is effectuated. MIs must ensure that LEIs transmitted to them are received and linked to theappropriate nominee brokered deposits on their records. MIs and Carrying Brokers must ensure they have to capacity to provide the LEIs toCDIC at the time and in the format specified by CDIC.3.2.4 Amending Legal Entity Identifier (LEI) The same LEI must be transmitted for the same associated firm (i.e. IntroducingBroker (IB) or Portfolio Manager (PM)), irrespective of the number of accounts thatassociated firm might hold through the Carrying Broker at a CDIC MI or when thedeposits are placed. Carrying Broker (CB) might, from time to time, be required to amend or change a LEIfor an associated party (i.e. IB or PM) for various business reasons (i.e. acquisitions,mergers, etc.). In such instances, the new LEI must be updated with memberinstitutions for any existing and future deposits.17

4.Roles and Responsibilities4.1Context The roles and responsibilities must be clearly defined and frame through a legalagreement between each party. As noted at the outset, best practices regardinglegal/contractual elements of this approach will be set out in an accompanyingdocument. The information below provide general high-level roles and responsibilities that eachparty in the chain of a nominee deposits will play. For legally binding roles andresponsi

Introducing Broker and Portfolio Manager . However, the concepts and examples provided are relevant to MFDA dealers, intermediaries and nominees and MFDA members should replace Carrying Broker and Introducing Broker with Carrying Dealer and Introducing Dealer