Trading Income and Income from GoC Securities Trading (A3)

PURPOSE

The purpose of this return is to provide information on an institution's total trading income as at the end of each fiscal quarter.

STATUTORY

BoC: Sections 628 and 600 of the Bank Act and Section 24 of the Bank of Canada Act.

OSFI: Sections 628 and 600 of the Bank Act and Section 495 of the Trust and Loan Companies Act.

APPLICATIONS

The return applies to the following broker-dealers and their parents, both of which are to file a single return: RBC and RBC Dominion Securities Inc., Scotia Bank and Scotia Capital Inc., TD and TD Securities, BMO and BMO Nesbitt Burns Inc., National Bank and National Bank Financial Inc., CIBC and CIBC World Markets Inc., Laurentian Bank and Laurentian Bank Securities Inc., HSBC Bank Canada and HSBC Securities (Canada) Inc.

In a single return, Section 1, 2, 3 are to be filed by parent entities: RBC, Scotia Bank, TD, BMO, National Bank, CIBC, Laurentian Bank, HSBC Bank Canada, Section 4 are to be filed by the broker-dealers subsidiaries: RBC Dominion Securities Inc., Scotia Capital Inc., TD Securities, BMO Nesbitt Burns Inc., National Bank Financial Inc., CIBC World Markets Inc., Laurentian Bank Securities Inc., HSBC Securities (Canada) Inc.

FREQUENCY

• Institutions with fiscal year-ends of October - Quarterly - January, April, July and October
• Institutions with fiscal year-ends of December - Quarterly - March, June, September and December

REPORTING DATES

The return is to be completed as of the last day of each quarter and submitted within 30 days of the reporting date as follows:

• Institutions with fiscal year-ends of October - January, April, July and October
• Institutions with fiscal year-ends of December - March, June, September and December

CONTACT AGENCY

Bank of Canada.

GENERAL INSTRUCTIONS

The return requires filing institutions to provide information on total trading income (whether positive or negative) broken down at Total Bank/Parent level and Broker-Dealer entity level. Additionally, the return asks filing institutions to report data connected to GoC securities trading income (whether positive or negative) at Broker-Dealer level. The understanding regarding the terminology of Total Bank/Parent is it covers the consolidated institution; however, some of the transactions from the insurance subsidiary are going to be reported under the insurance segment which would not be included under the Parent's net trading income.

A section capturing the GoC securities trading income at Total Bank/Parent level will be part of future return enhancements and it is not currently expected to be reported. However, a placeholder has been included in the return template as a reminder to filers that anticipated talks will occur in due course.

The information to be provided in the return must be reported in thousand of Canadian dollars, in Total Currency and booked in- and outside Canada. In doing so, when a transaction involving a foreign currency occurs, reporting institutions are expected to use the closing FX rate as of the settlement date.

It is intended that the definition of 'total trading income' encapsulates any type of transaction connected to buying and selling any type of security. The information is tied to the P3 Income Statement return as the starting point for this section of the return.

As far as the Government of Canada securities trading income is concerned, the scope encompassed in this category is strictly focused on GoC Bonds and Treasury Bills (T-Bills) cash transactions.

Total Bank/Parent is intended as the consolidated entity that conducts its own operations but has control over its subsidiaries business. All the results generated by the parent entity itself and its subsidiaries are consolidated for regulatory purposes, i.e. all the business results are aggregated.

The Broker-Dealer entity is intended as a subsidiary that operates in a specific business segment. Typically, this business segment includes services like: corporate and investment banking, sales, trading, advisory to corporations, institutional investors, governments, central banks and underwriting activities.

1. TRADING INCOME (TOTAL BANK/PARENT)

(a) Trading Income as stated on P3

Must follow the definition and be equal to that of the P3 (Trading Income) return cell 2046. As a result, the A3 is to reconcile to the value reported on the P3, and not vice versa. Conditional on this the cell is expected to include:

• Realized and unrealized gains (losses) on Held for Trading instruments other than derivatives
• Realized and unrealized gains (losses) on interest rate, equity, commodity and other derivative contracts held for trading purposes, including forward, futures, swap and options contracts
• Realized and unrealized gains (losses) on foreign exchange contracts held for trading purposes, including forward, futures, swap and options contracts, and revaluation gains (losses) on spot trading positions;
• Realized and unrealized gains (losses) on gold and silver bullion and other precious metals held for trading purposes
• Realized and unrealized gains (losses) on derivative contracts and other instruments used to hedge instruments held for trading purposes

Other instructions:

• Realized and unrealized gains (losses) on derivative instruments held for trading purposes include all revenues and 1(b) expenses directly related to these instruments
• The net trading income reported in this cell represents the net trading income at consolidated level and includes the net trading income generated at the broker-dealer level. This is because from an accounting perspective the consolidation requires combining financial results of several subsidiaries companies into the combined financial results of the parent company

(b) Direct Trading Expenses

Include:

• Direct trading expenses include only brokerage and clearing fees which are part of net trading income of the parent {1(a)}. It is understood that there is a chance that some of brokerage and clearing fees may not be part of net trading income and hence not included where these may have been treated as non-interest expenses in entity's books of records.
• Direct trading expenses must be entered with a negative sign in the return.

Exclude:

• Any other expense that is not a brokerage or clearing fee.

(c) Gross Trading Income

Include:

• Gross trading income specifically related to contra-revenue items mentioned in 1(b) above and calculated as follows: 1(c) = 1(a) – [–1(b)]

2. TRADING INCOME (BROKER-DEALER)

(a) Net Trading Income

Include:

• Realized and unrealized gains (losses) on Held for Trading instruments other than derivatives
• Realized and unrealized gains (losses) on interest rate, equity, commodity and other derivative contracts held for trading purposes, including forward, futures, swap and options contracts
• Realized and unrealized gains (losses) on foreign exchange contracts held for trading purposes, including forward, futures, swap and options contracts, and revaluation gains (losses) on spot trading positions;
• Realized and unrealized gains (losses) on gold and silver bullion and other precious metals held for trading purposes
• Realized and unrealized gains (losses) on derivative contracts and other instruments used to hedge instruments held for trading purposes

Other instructions:

• Realized and unrealized gains (losses) on derivative instruments held for trading purposes include all revenues and 2(b) expenses directly related to these instruments
• The net trading income reported in this cell represents the net trading income at broker-dealer entity level only. To this end, it is intended that this item is reported as a subset of cell 2046 from the P3 return specifically pertaining to the broker-dealer entity trading activity

(b) Direct Trading Expenses

Include:

• Direct trading expenses include only brokerage and clearing fees which are part of net trading income of the broker-dealer {2(a)}. It is understood that there is a chance that some of brokerage and clearing fees may not be part of net trading income and hence not included where these may have been treated as non-interest expenses in entity's books of records.
• Direct trading expenses must be entered with a negative sign in the return.

Exclude:

• Any other expense that is not a brokerage or clearing fee.

(c) Gross Trading Income

Include:

• Gross trading income specifically related to contra-revenue items mentioned in 2(b) above and calculated as follows: 2(c) = 2(a) – [–2(b)]

3. GoC SECURITIES TRADING INCOME (TOTAL BANK/PARENT) – PLACEHOLDER

This section is considered a placeholder in the current state of the return and – at this stage – it is not expected to be reported.

4. GoC SECURITIES TRADING INCOME (BROKER-DEALER)

Section 4 asks filing institutions to report either the net or gross trading income arising from Government of Canada cash transactions. The scope of this section is specifically focused on the cash trading activity of GoC securities generated at broker-dealer level.

The option to report either net or gross amounts for this section stems from the fact that the reporting of this information has been proven to be very challenging.

From a reporting perspective, section 4 represents the greatest level of granularity reported in this return. To this end, this section can be considered a subset of the original 2046 cell from the P3 Income Statement return where information is filtered out multiple times.

Example: Cell 2046 on the P3 Income statement

• Filter by broker-dealer trading activity
  • Filter by GoC securities cash transactions

(a) Net trading income from cash trades of GoC securities (bonds & T-bills) – Option to report either 4(a) or 4(b)

Include:

• Net trading income deriving from GoC securities bonds and GoC T-bills cash transactions executed at broker-dealer level
• GoC securities bonds and GoC T-bills cash transactions executed by the broker-dealer with its parent (and initiated by either the broker-dealer or by the parent) must also be included in this line item net of fees

Exclude:

• Income from coupons deriving from GoC securities trading
• Securities lending / securities borrowing whose underlying is a GoC security
• Securities guaranteed by the GoC
• Repo / Reverse Repo whose underlying is a GoC security
• GoC securities that are held for hedging purposes or which are the underlying of a derivative contract such as futures / forwards, swaps, options
• Provincial and municipal bonds

Other Instructions:

• Margin transactions of GoC securities are excluded from the return scope
• GoC securities trading income must be calculated by using marked-to-market valuations and should include any security discount amortization
• Item 4(a) is expected to be reported as the first best option for section 4 of this return and it is strongly preferred than 4(b)
• In order to derive a net figure for this line item the same typology of contra-revenue accounts outlined in previous sections applies. These are: brokerage fees and clearing fees only. These fees must be directly related to the cash trading activity of GoC securities executed only by the broker-dealer and must be deducted from the final calculation of this line item

(b) Gross trading income from cash trades of GoC securities (bonds & T-bills) – Option to report either 4(a) or 4(b)

Include:

• Gross trading income deriving from GoC securities bonds and GoC T-bills cash transactions executed at broker-dealer level
• GoC securities bonds and GoC T-bills cash transactions executed by the broker-dealer with its parent (and initiated by either the broker-dealer or by the parent) must also be included in this line item gross of fees

Exclude:

• Income from coupons deriving from GoC securities trading
• Securities lending / securities borrowing whose underlying is a GoC security
• Repo / Reverse Repo whose underlying is a GoC security
• Securities guaranteed by the GoC
• GoC securities that are held for hedging purposes or which are the underlying of a derivative contract such as futures / forwards, swaps, options
• Provincial and municipal bonds

Other Instructions:

• Margin transactions of GoC securities are excluded from the return scope
• GoC securities trading income must be calculated by using marked-to-market valuations and should include any security discount amortization
• Item 4(b) is expected to be reported as the second-best option for section 4 of this return
• In order to derive a gross figure for this line item the same typology of contra-revenue accounts outlined in previous sections applies. These are: brokerage fees and clearing fees only. These fees must be directly related to the cash trading activity of GoC securities executed only by the broker-dealer and must be included in the final calculation of this line item