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Paige Ward

General Counsel, Corporate Secretary and Vice President, Policy

(416) 943-5838

MSN - 0023

Dec 19, 2003

Late Trading and Market Timing

MFDA Staff Notices are intended to assist Members and their Approved Persons in the interpretation, application of and compliance with requirements under MFDA By-laws and Rules. Notices make reference to these requirements and set out MFDA staff's interpretation of how to comply with these requirements. Notices may also include best practices or guidance.


Past investigations into the trading practices of U.S. mutual funds have uncovered a number of trading abuses, such as late trading and market timing, which benefit selected mutual fund investors at the expense of others. There are general concerns that these recent events in the U.S. may have impacted investor confidence in the Canadian mutual fund industry. In this environment, it is important that the MFDA and its Members take steps to ensure that relevant MFDA requirements are being met.

On November 5, 2003 the Ontario Securities Commission sent a letter to all managers of publicly offered retail mutual funds that trade in Ontario requesting information concerning late trading and market timing practices. The MFDA is making a similar information request of its Members with a view to determining:

  1. the existence of late trading activity; and
  2. the nature and extent of market timing activity and any related public interest concerns.

The MFDA, the OSC and other recognizing members of the Canadian Securities Administrators have agreed to cooperate and coordinate their regulatory efforts on this matter, including any subsequent follow-up activities and regulatory action.

Policies, Procedures and Internal Controls

Members are expected to have effective trading procedures, supervisory arrangements and other internal controls to ensure that late trading and market timing practices are not occurring within the Member. This includes internal controls designed to detect breaches of those procedures. It also includes controls to ensure that the Member’s procedures for correcting mutual fund trading errors are not used to effect late trading. 

The MFDA expects that all Members will immediately take steps to ensure that they have procedures, arrangements and other controls in place to safeguard against late trading abuses.

The MFDA will be conducting a survey of Members on late trading and market timing practices. Completed surveys are to be received by the MFDA no later than January 30, 2004. As well, the MFDA will conduct examinations on these matters from time to time.

Late Trading and Market Timing

Late Trading

Late trading is illegal and occurs when purchase or redemption orders are received by the mutual fund company after the close of business, but are filled at that day’s price rather than the next day’s price. Late trading is a violation of National Instrument 81-102 Mutual Funds, which regulates the distribution of mutual funds.

Investors who seek to purchase or redeem mutual fund transactions after the close of trading at the NAV calculated for the same trading day gain the possibility of an information advantage based on after-close news that could affect the mutual fund’s holdings but is not reflected in the NAV pricing for that day. In most cases, NAVs are set as at 4 p.m. Eastern Standard time, meaning that in those cases all orders received by the fund company after that time must be valued at the NAV set on the next business day. This is so even if the dealer received the order from the client prior to 4 p.m. EST. Late trading is not excused or mitigated as a result of the consent or acquiescence of a mutual fund company.

Market timing

Market timing involves short-term trading of mutual fund securities to take advantage of short-term discrepancies between the price of a mutual fund’s securities and the stale values of the securities within the fund’s portfolio. Market timing transactions include mutual fund trades that occur when the purchaser or seller believes that the mutual fund’s NAV does not fully reflect the value of the fund’s holdings as for example, when the fund has in its portfolio particular holdings which are priced on a basis that does not include the most updated information possible. International funds are most vulnerable to this type of trading abuse, as traders can exploit differences between time zones.  Funds holding thinly traded securities are another example of a type of fund vulnerable to such abuse.

In addition, market timing can involve frequent switches or active short-term purchase and redemption strategies. Mutual funds are generally designed for long-term investing. Heavy short-term trading creates more transaction costs, which reduces returns for other longer-term investors. 

DM #330006