OSC Notice 11-774 - Request for Comments Regarding Statement of Priorities for Financial Year to End March 31, 2017

ONTARIO SECURITIES COMMISSION
NOTICE 11-774 – STATEMENT OF PRIORITIES

REQUEST FOR COMMENTS
REGARDING STATEMENT OF PRIORITIES
FOR FINANCIAL YEAR TO END MARCH 31, 2017

The Securities Act requires the Commission to deliver to the Minister and publish in its Bulletin each year a statement of the Chair setting out the proposed priorities of the Commission for its current fiscal year in connection with the administration of the Act, the regulations and rules, together with a summary of the reasons for the adoption of the priorities.

This Statement of Priorities is a subset of our overall OSC Business Plan which is aligned with our OSC Strategic Plan. The document sets out the priority actions that the OSC will take in 2016-2017 to address each of the goals and its related priorities. While the proposed priorities will potentially impact more than one organizational goal, each priority is identified only under the specific goal where the greatest impact is expected. In certain cases, the process required to properly assess the issues, including consultations with market participants, and to develop and implement appropriate regulatory solutions, may take more than one year to complete.

In an effort to obtain feedback and specific advice on our proposed priorities, the Commission is publishing a draft Statement of Priorities which follows this Request for Comments. The Commission will consider the feedback, and make any necessary revisions prior to finalizing and publishing its 2016-2017 Statement of Priorities. Shortly after the conclusion of our 2015-2016 fiscal year the OSC will publish a report on its progress against its 2015-2016 priorities on our website.

Comments

Interested parties are invited to make written submissions by May 9, 2016 to:

Robert Day

Senior Specialist Business Planning

Ontario Securities Commission

20 Queen Street West

22nd Floor

Toronto, Ontario M5H 3S8

(416) 593-8179

[email protected]

March 10, 2016

 

OSC Statement of Priorities Draft For Comment 2016 -- 2017

 

March 10, 2016

 

Introduction

We are pleased to present the Chair's Statement of Priorities for the Commission for the year commencing April 1, 2016. The Securities Act (Ontario) requires the Ontario Securities Commission (OSC) to publish the Statement of Priorities in its Bulletin and to deliver it to the Minister by June 30 of each year. This Statement of Priorities also supports the OSC's commitment to be both effective and accountable in delivering its regulatory services.

This Statement of Priorities sets out the OSC's strategic goals and the specific initiatives that the OSC will pursue in support of each of these goals in 2016-2017. The Statement of Priorities also describes the environmental factors that the OSC has considered in setting these goals.

OSC vision

To be an effective and responsive securities regulator -- fostering a culture of integrity and compliance and instilling investor confidence in the capital markets.

OSC mandate

To provide protection to investors from unfair, improper or fraudulent practices and to foster fair and efficient capital markets and confidence in capital markets.

Our environment

The regulatory framework for Ontario's capital markets is designed to provide protection to investors while fostering fair and efficient capital markets. Public confidence in these markets can be affected by many factors, including the stability of the financial system, the economic health of the country and the volatility in the marketplace. The OSC is addressing a wide range of issues and risks to achieve its vision and mandate. Key challenges and issues that may influence the OSC's policy agenda, its operations and the way it uses its resources are set out below.

We engage with industry participants, investors and other regulators to understand the issues and concerns they face. Investor advocacy groups and the Investor Advisory Panel are important sources of insight to help the OSC better understand investor needs and interests. Expectations that the OSC will focus on investor protection continue to grow, and the OSC will continue to reach out and connect with these groups.

Extremely challenging market conditions are having widespread impacts on all market participants. Significant reductions in public financing activities and related filings and lower market activity levels are adversely affecting the revenues and profitability of many market participants. Falling market capitalization levels are adversely affecting our public issuers.

Changing demographics

Demographics will continue to generate a range of investor-focused issues. Disparate investor segments (e.g., seniors, millennials) interact differently in our markets, using different channels and having different investment horizons and objectives. Delivery of advice is changing as investment choices become more complex and structural shifts, such as the continuing shift from defined benefit to defined contribution pension plans, require investors to take more responsibility for investing. Evolving market channels, such as automated financial advice, are redefining the delivery of client wealth management services and the fees charged for advice.

A well-functioning investor/advisor relationship remains critical to the economic well-being of Ontarians and ultimately to achieving healthy capital markets. Globally, better alignment of the interests of firms with the expectations of investors is evolving. The newly introduced changes to the exempt market regulatory regime are expected to attract new investors to the capital markets and this will necessitate additional oversight activities to monitor market conduct, firms' compliance cultures and how advisors meet the interests of their clients.

Technological innovation

Rapidly evolving technology-enabled innovations continue to disrupt and transform our capital markets. A range of disruptive innovations have emerged. These include growth in block chain based crypto-currencies, peer-to-peer lending and other FinTech (technology facilitated financial services) innovations. FinTech has the potential to revolutionize access to capital by small businesses. Over the past few years, a number of products and business models have emerged, catering to the needs of small businesses. Larger financial institutions are trying to accelerate their transition to these new models and technologies through acquisition. The OSC will need to closely monitor the impact of FinTech changes to determine any potential market implications and whether regulation remains effective or if regulatory changes are required.

Increased dependence on digital connectivity and data collection and analysis, creates challenges for businesses and raises potential exposure to disruptions, including cybersecurity vulnerabilities. Marketplace changes such as the speed of trading, the quality of trade executions and volatility requires us to continue to monitor the effectiveness of our market structure regulation.

Globalization

Globalization has wide-ranging impacts on Canadian capital markets. Harmonization and coordination of regulation continues to be a key focus area for the OSC, given the global connection of the markets we regulate. Mobility of capital creates a strong need for coordination with other regulators to achieve valuable regulatory alignment both domestically and around the world.

The OSC continues to play an active role in international organizations such as the International Organization of Securities Commissions (IOSCO) to influence and promote changes to international securities regulation that will benefit Ontario markets and participants. The OSC also works as part of the Canadian Securities Administrators (CSA) to harmonize rules and their application across the country to facilitate business needs. Through these efforts, the OSC works hard to have effective cross-jurisdiction enforcement activities and gain timely insight, understanding and input into emerging regulatory issues to achieve better regulatory outcomes.

Regulatory balance

Securities regulators face growing pressures to respond appropriately to market issues while avoiding over-regulation. The need for an appropriate and cost-effective regulatory framework is critical. Market participants are focused on regulatory burden as the complexity of regulatory requirements often requires more resources to comply. These challenges are made even more difficult by the growth of differently regulated investment options available to investors.

While the OSC is always focused on the need for fiscal responsibility, that focus has been magnified by the current market environment, which has impacted many market participants. The OSC will continue to try to identify opportunities to avoid or reduce undue burdens and seek opportunities to streamline regulatory measures that balance improving the fairness, efficiency and competitiveness of Ontario's capital markets while maintaining appropriate safeguards for investors.

OSC operations

A focus on our staff continues to be important for the OSC. Attracting, motivating and retaining top talent in a competitive environment is a challenge and key to delivering on our mandate. We continue to invest in data and information systems and provide the right tools and training to leverage the talents of our people. These needs will impact our budget decisions for 2016-2017 and beyond.

OSC 2016 -- 2017 regulatory goals

1. Deliver strong investor protection -- The OSC will champion investor protection, especially for retail investors

2. Deliver responsive regulation -- The OSC will identify important issues and deal with them in a timely way

3. Deliver effective compliance, supervision and enforcement -- The OSC will deliver effective compliance oversight and pursue fair, vigorous and timely enforcement

4. Promote financial stability through effective oversight -- The OSC will continue to identify, address and mitigate systemic risk and promote stability by implementing programs to effectively oversee and supervise our capital markets including the OTC derivatives market, the fixed income market, and key infrastructure entities such as clearing agencies.

5. Be an innovative, accountable and efficient organization -- The OSC will be an innovative and efficient organization through excellence in the execution of its operations, and will demonstrate accountability in fulfilling its mandate and achieving its goals

The OSC continues to make strong advances in moving its regulatory agenda forward and has made a number of key improvements in the way it approaches its work. The OSC is increasingly active in providing guidance to market participants and investors and in using open and consultative processes to assess and address issues. We remain focused on evidence driven policy-making.

The OSC has significantly increased its level of cooperation with many domestic entities, including the Bank of Canada, Federal Finance and the Office of the Superintendent of Financial Institutions, to achieve more harmonized and coordinated outcomes. Enforcement activity conducted with police and other enforcement bodies continues to expand, resulting in more successes across a broader range of enforcement actions and specifically in addressing fraud.

Confidence in fair and efficient markets is a prerequisite for economic growth. The OSC regulates the largest market in Canada and our actions have impacts for Ontario and the rest of Canada. The OSC is committed to promoting safe, fair and efficient markets in Ontario and has identified a broad range of initiatives to improve the regulatory framework.

Organizational priorities

This Statement of Priorities is focused on our plan for 2016-2017. In several cases these initiatives are ongoing from prior years and some will not be completed within 2016-2017. Initiatives often span more than one year for various reasons, including:

• The complexity and impact of issues warrants careful analysis and review of potential options and implications

• Consultation contributes to better outcomes. Consultation does however take time and achieving national consensus for harmonized approaches is important for all

• Regulatory choices can have fundamental and profound impacts; the cost of being wrong can be very significant and the impacts on investors and industry are often significant

In some instances, specific priorities from the previous year are not carried forward in our Statement of Priorities if the remaining work is minimal, or has been integrated into our daily operations.

This document sets out the priority areas on which the OSC intends to focus its resources and actions in 2016-2017. It is important to note that the majority of OSC resources remain focused on delivering the core regulatory work (authorizations, reviews, compliance and enforcement) undertaken by the OSC to maintain high standards of regulation in Ontario's capital markets. Each of the proposed priorities has been aligned under one of the five OSC regulatory goals.

Goal 1 -- Deliver strong investor protection

Ontario investors continue to face a low interest rate environment with significant market volatility. These low rates will likely persist given weak commodity prices and subdued global growth. Older Canadians are challenged to achieve sufficient investment returns for their retirement. Investors continue to seek opportunities to achieve adequate yield on their investments or capital appreciation. This push for higher returns can expose them to investment risks, including increased leverage that can have life-changing outcomes.

The OSC is strongly committed to investor protection and is proposing a number of investor-focused initiatives. Investors need to be confident in the fairness of the market and products in which they invest. Our markets have rebounded from post-2008 levels however volatility remains a concern. Investors are placing increasing reliance on financial advisors and need to be confident that the advice they receive is appropriate and unbiased. We will continue to seek improvements to the culture of financial services businesses, including the incentive structures they use. Weak compliance systems in combination with poor compliance cultures at firms can result in inappropriate advice and unsatisfactory investor outcomes. Where successful achievement of investment objectives is not a shared outcome between advisors and investors, investor trust and confidence in the financial system is lost.

The OSC is committed to achieving better alignment between the interests of investors and their advisors. The OSC has focused on collecting and undertaking research to better understand the client advisor relationship. In October 2015, the Canadian Securities Administrators (CSA) published A Dissection of Mutual Fund Fees, Flows and Performance, independent research prepared by Professor Douglas Cumming. Professor Cumming's research on the impacts of compensation on mutual fund sales finds that compensation can materially drive mutual fund sales, in some cases, to the detriment of the investor. In June 2015, the Brondesbury Group completed a literature review that examined whether advice and investment outcomes vary depending on whether advisors are compensated through commissions or fee-based arrangements. This research, together with other available research, industry data and feedback from stakeholder consultations and our mystery shopping initiative, will inform our deliberations and be used to support a policy recommendation on how best to move forward.

Putting the interests of investors first

Priority Issue	Implement regulatory reforms that improve the advisor/client relationship
Action Plan/ Next Steps	a.	Publish and conduct consultations on proposed regulatory provisions to create a best interest standard
	b.	Publish and conduct consultations on targeted regulatory reforms and/or guidance under NI 31-103 to improve the advisor/client relationship
	c.	Following stakeholder consultations, develop recommendations to the Commission on regulatory reforms to improve the advisor/client relationship including an implementation plan
	d.	Finalize analysis of advisor compensation practices and identify those practices that appear inconsistent with current regulatory expectations
Success Measures/ Expected Outcomes	a.	Consultations on provisions for creating a best interest standard completed
	b.	Consultations on proposed targeted reforms and/or guidance to NI 31-103 completed
	c.	Recommendation presented to Commission on the regulatory reforms required to improve the advisor/client relationship. Implementation plan included
	d.	Staff Notice summarizing compensation review findings including expectations for compliance and best practices, published

Addressing compensation arrangements in mutual funds and empowering investors through better disclosure

Priority Issue	Determine what regulatory action is needed to address embedded commissions and other types of compensation arrangements and improve retail investment product disclosure
Action Plan/ Next Steps	a.	Communicate a policy direction on embedded commissions and other types of compensation arrangements
	b.	Develop regulatory proposals that address conflicts of interest created by compensation arrangements related to investment funds
	c.	Finalize a mandated CSA risk classification methodology to improve the comparability of risk ratings of mutual funds
	d.	Finalize a summary disclosure document for ETFs that can be delivered to investors
Success Measures/ Expected Outcomes	a.	Action plan identified by the OSC, including a recommendation about embedded commissions and other types of compensation arrangements
	b.	Rules implementing a CSA risk classification methodology finalized
	c.	Rules implementing a summary disclosure document for ETFs finalized.

Increased oversight of the exempt market

Recent changes to increase access to the exempt market have expanded investment opportunities for all investors. The OSC will need to be vigilant in its oversight of these markets as they evolve under the new regulatory framework. Retail investors seeking to participate in the exempt market will need to be supported with guidance and tools to help them to understand and assess the opportunities and risks associated with these investments. The OSC will support the implementation of the expanded exempt market access through targeted outreach, oversight and supervision processes.

Priority Issue	Support investors in the expanded exempt market through effective oversight
Action Plan/Next Steps	a.	Oversee market participants relying on the expanded capital raising exemptions in Ontario through a risk based supervision program for issuers, registrants and portals
	b.	Collect and analyze data on the use of capital raising exemptions in Ontario to assess how the exemptions are being used to further capital formation
Success Measures/ Expected Outcomes	a.	Risk-based supervision program for registrants, issuers and portals using the new capital-raising exemptions developed; questions included in 2016 Risk Assessment Questionnaire to gather information on the use of the new exemptions
	b.	Emerging trends and levels of compliance identified and addressed and report on exempt market status published

Improving education, engagement and alignment with investors' interests

Investors are striving to achieve sufficient investment returns to finance lifestyle, education costs for children and retirement goals for themselves or aging parents. As investors search for yield and capital appreciation, they can become more susceptible to fraud and other investment risks that can have life-changing outcomes. These issues can be magnified when there are wide gaps in the levels of experience and financial literacy among investors. This results in different needs for support and guidance.

The growing use of behavioural nudging in designing and delivering financial services information is another area of focus. The OSC Investor Office will be working to understand how this is used in other jurisdictions to design appropriate supports for Ontario investors.

The Investor Office will be expanding and modernizing the OSC's efforts in investor engagement, research, education and outreach, to help investors to build their knowledge, understanding and confidence in planning for their investment goals and retirement finances. The Investor Office will also continue bringing new perspectives to inform OSC policy-making and operations to better align with investors' interests.

The Investor Office will continue to seek input from investor advocacy groups, including the Investor Advisory Panel, that together with other available research, industry data and stakeholder feedback, will inform its understanding of issues that are affecting investors. The Investor Office will use this information in developing tailored solutions to reach the broad range of at-risk investor groups, including seniors, millennials and new Canadians. The initiatives set out below will advance achievement of the OSC's investor protection mandate.

Priority Issue	Advance retail investor protection, engagement and education through the OSC's Investor Office
Action Plan/Next Steps	a.	Improve outreach and education focused on senior and vulnerable investors and work with the Investor Advisory Panel to identify further opportunities to advance investors' interests
	b.	Improve our understanding of investor issues and needs through targeted research, seminars and roundtables
	c.	Enhance, expand and develop innovative tools and resources to improve OSC investor engagement and develop a framework to measure the impacts and outcomes achieved
Success Measures/ Expected Outcomes	a.	Publication of research that identifies opportunities to achieve better investor outcomes through the application of behavioural finance
	b.	Status update on the OSC's activities related to its seniors strategy published
	c.	Status update on the OSC's work with the IAP to improve the risk profiling used in the retail investment advice process published

Goal 2 -- Deliver responsive regulation

Monitor and assess the impact of recent regulatory reforms in Ontario

The OSC is committed to delivering responsive regulatory oversight to meet its mandate. The OSC believes that an "evidence-based approach" is critical to effective policy development and regulatory oversight and it is crucial to track and understand the impacts of its regulatory actions. The OSC will undertake a number of reviews of recently implemented regulatory reforms to assess whether expected results are being achieved and to identify opportunities for further regulatory changes to better achieve its regulatory objectives.

Priority Issue	Actively monitor and assess impacts of recent regulatory changes on the market to confirm that expected outcomes are being achieved
Action Plan/ Next Steps	a.	Commence post-implementation analysis of the impact of the Client Relationship Model -- Phase 2 (CRM2) and Point of Sale (POS) amendments
	b.	Conduct targeted disclosure reviews to monitor the progress on corporate governance changes related to disclosure requirements for Women on Boards and in executive officer positions and determine the impact of those changes in our markets
Success Measures/ Expected Outcomes	a.	Post-implementation analysis of CRM2 and POS conducted
	b.	Review of all TSX-listed issuers to assess compliance with disclosure requirements for Women on Boards completed. Public focus on corporate governance changes related to this disclosure is maintained

Monitor and support market structure evolution

Our regulatory framework needs to remain current and responsive to the continuing evolution of market structures and products. The markets are increasingly complex and the pace of innovation and technological changes requires us to regularly examine our market structure framework and assess whether changes are necessary to promote market efficiencies, protect investors and maintain investor confidence.

Priority Issue	Closely monitor market structure changes and determine if additional regulatory responses are required
Action Plan/ Next Steps	a.	Finalize the Order Protection Rule regulatory framework with the CSA including establishing a market share threshold, trading fee caps, market data methodology and speed bumps
Success Measures/ Expected Outcomes	a.	Final Order Protection Rule framework published

Improve alignment with international standard setting

The importance of regulatory alignment both domestically and around the world continues to grow as the mobility of capital and integration of markets advances. Globalization and the sustained growth of cross border activities means that the OSC must deal with regulatory matters that have both national and international dimensions. By engaging with its international counterparts, especially through IOSCO, the OSC obtains timely insights and understanding of emerging compliance and regulatory issues to develop informed, proactive regulatory solutions, and also help shape international standards that are aligned with the needs of our capital markets.

Priority Issue	Improve alignment with international standard setting to deliver regulatory solutions that meet the needs of Ontario's markets and participants
Action Plan/ Next Steps	a.	Actively participate in IOSCO and other regulatory authorities globally to promote the development of new international standards and regulatory responses to areas including cyber resilience, resolution and recovery of CCPs, vulnerabilities in the asset management sector, the protection of client assets, and the ability of regulators to exchange information in compliance and enforcement situations
Success Measures/ Expected Outcomes	a.	Our domestic regulatory framework and priorities are aligned with new international standards
	b.	Participate in the Task Force on Market Conduct to publish a report outlining tools that regulators can use to promote appropriate conduct by market professionals

Goal 3 -- Deliver effective compliance, supervision and enforcement

Effective registration and compliance oversight programs combined with timely enforcement, help to deter misconduct and non-compliance by registrants and market participants. These activities are essential to protect investors and foster trust and confidence in our capital markets.

Effective compliance and supervision remains a central focus as domestic and international regulation, guidelines and responsibilities evolve. As new obligations are implemented, we will monitor for compliance. In our core work we are relying more on trend and risk analysis and monitoring of changes in compliance. We will continue to undertake targeted compliance reviews of high risk and new registrants, including online advice and portal business models. We will also conduct targeted prospectus and continuous disclosure reviews of issuers, investment funds and structured products as they respond to market developments and product innovations, and we will publish OSC staff guidance as warranted.

We need to continue to evolve our compliance and enforcement approaches. We continue to identify serious breaches of Ontario securities law through our quasi-criminally focused Joint Serious Offences Team (JSOT) program, which is a joint enforcement effort with the RCMP and OPP. The recently proposed OSC Whistleblower program represents another new tool to deter misconduct. We are also continuing to invest in tools and technologies that will assist us to identify and assess patterns of inappropriate behaviour and complex offenses.

Enhance compliance through effective inspections, supervision and oversight

Priority Issue	Protect investors and foster confidence in our markets by upholding strong standards of compliance with our regulatory framework
Action Plan/Next Steps	a.	Continue effective oversight of registrants focusing on high risk and new registrants
	b.	Assess compliance with OSC Rule 91-507 Trade Repositories and Derivatives Data Reporting
	c.	Work closely with self-regulatory organizations (SROs) to coordinate compliance efforts on issues in common, such as sales incentives and related conflicts of interest
Success Measures/ Expected Outcomes	a.	2016 OSC Risk Assessment Questionnaire issued and findings assessed. Annual Summary Report for Dealers, Advisers and Investment Fund Managers published
	b.	Review of large domestic derivatives dealers completed and analysis of key findings and trends identified
	c.	Reviews finished and analysis of data completed

Actively pursue enforcement action against fraud and other serious securities law violations

Priority Issue	Actively pursue timely and impactful enforcement cases involving fraud and other serious securities laws violations
Action Plan/Next Steps	a.	Based on feedback and consultations, implement OSC Whistleblower Program, assess information received and establish effective protocols and processes to begin to use this input to pursue potential cases
	b.	Conduct collaborative investigations of fraud and recidivist cases through JSOT using the provisions of the Securities Act or the Criminal Code
	c.	Complete the enhanced Multilateral Memorandum of Understanding to facilitate information sharing and cross-border enforcement activities
Success Measures/ Expected Outcomes	a.	JSOT investigates fraud and recidivist cases and lays quasi-criminal and criminal charges. Results will be published in the annual enforcement report
	b.	Investor protection improved through increased public awareness of fraud and other serious securities laws violations

Goal 4 -- Promote financial stability through effective oversight

Global capital markets are increasingly interconnected by technology, business models and investment flows and this creates potential for systemic risk. The OSC works with other regulators to better understand points of integration and identify potential risks to monitor and mitigate.

Enhance oversight of the fixed income market

Fixed income secondary market trading is a substantial segment of our capital markets and the transparency, fairness and liquidity of these markets can affect the cost of capital. The OSC is seeking solutions to improve access, transparency and fairness in this market.

In 2015-2016 the OSC took steps to better enhance regulation in the fixed income market and identify opportunities to improve market transparency. The CSA published CSA Staff Notice and Request for Comment 21-315 Next Steps in Regulation and Transparency of the Fixed Income Market, which set out steps to enhance regulation in the fixed income market and identify opportunities to improve market transparency to better protect investor interests. Increased transparency of this data will also allow regulators to assess this information.

Ensuring fixed income data is available to regulators and enhancing corporate debt transparency for all investors are significant first steps in modernizing the regulatory framework for the fixed income market and should improve market confidence. The OSC plans to build on this work through the initiatives set out below:

Priority Issue	Increase transparency in the fixed income market through publication of corporate debt trading data provided to the Investment Industry Regulatory Organization of Canada (IIROC)
Action Plan/Next Steps	a.	Implement public transparency of fixed income trading data, specifically for corporate debt, with IIROC acting as the information processor for corporate debt
	b.	Monitor fixed income trading data to assess the impact of transparency
	c.	Conduct a comprehensive review of dealers' allocation practices for new debt issues
Success Measures/ Expected Outcomes	a.	Increased corporate debt post trade information available for all investors
	b.	IIROC acting as the information processor
	c.	Review of dealers' allocation practices completed

Advance OSC systemic risk oversight and OTC derivatives regulatory regime

The OSC works with many domestic and international regulators to monitor and better understand the key components of systemic risk and how they interact. Internationally, the OSC works with the Financial Stability Board, IOSCO and others to remain abreast of emerging risks. Domestically, the OSC is connected to various regulators through the Heads of Agencies, which includes the Bank of Canada, Federal Finance and The Office of the Superintendent of Financial Institutions. These interactions improve the resilience of our markets through shared communication and understanding of areas where our regulatory responsibilities intersect.

Priority Issue	Enhance OSC systemic risk oversight
Action Plan/Next Steps	a.	Work with other regulatory agencies to monitor trends and risks across various market segments and participants including: equities, fixed income, OTC derivatives, clearing agencies, derivatives dealers
Success Measures/ Expected Outcomes	a.	Market data analytics capabilities related to systemic risk monitoring developed
	b.	Participation on international and domestic committees where emerging systemic risk topics and tools are discussed and developed.

Throughout the last year, the OSC made significant progress towards implementing a trade reporting framework and gathering over-the-counter (OTC) trade data. The next steps are to better understand the data and finish the design of a regulatory framework and operational program to effectively oversee and supervise the OTC derivatives market and its participants. This must be undertaken together with our regulator partners. The OSC will continue its progress in these areas through the initiatives set out below:

Priority Issue	Continue development and implementation of OTC derivatives regulation
Action Plan/Next Steps	a.	Introduce mandatory, centralized clearing for certain OTC derivatives
	b.	Propose a registrant regulation framework for derivatives market participants
	c.	Assess trade reporting data to identify markets trends/risks
Success Measures/ Expected Outcomes	a.	Rules to introduce mandatory, centralized clearing for certain OTC derivatives finalized
	b.	Draft rule setting out a registrant regulation framework for derivatives market participants published for comment
	c.	OTC trade reporting compliance confirmed through on-site inspections; and systemic risks or problems identified

Enhance oversight of industry cybersecurity preparedness

Cyber-attacks are a major and growing risk for market participants and regulators. Increased dependence on digital connectivity (e.g., online banking and mobile payment systems), combined with exponential growth and reliance on data, increases exposure to disruptions, resilience and other cybersecurity issues. Event-driven algorithmic trading can potentially accelerate the speed and breadth of cybersecurity disruptions. Awareness continues to grow as high-profile events (e.g., Target, J. P. Morgan) bring the potential negative impacts into clearer focus. Cyber-attacks at a primary level can impair companies' ability to operate, and also have financial and service impacts. Perhaps more importantly, issues such as loss of business or client data and related reputational impacts can be even more damaging if they erode market confidence.

The OSC has a central role to play in assessing and promoting readiness and supporting cybersecurity resilience within the industry. While industry is already taking action to understand and mitigate cybersecurity risks, it is clear continued vigilance in this area will be required. The OSC will be undertaking initiatives to promote proper due diligence by market participants in relation to internal breaches and intrusions from external parties including:

Priority Issue	Promote cybersecurity resilience through a better understanding of the risks and greater collaboration with market participants and other regulators on risk preparedness and responsiveness
Action Plan/Next Steps	a.	Improve collaboration and communication with market participants on cybersecurity issues
	b.	Assess the level of market participant cybersecurity resilience, including measures for protection of personal investor data
	c.	Improve market participants' understanding of OSC cybersecurity oversight activities, including providing guidance on expectations for market participants' cybersecurity preparedness
Success Measures/ Expected Outcomes	a.	Notice published that sets out current OSC market participant and infrastructure oversight activities
	b.	Protocols/thresholds for reporting and sharing information developed
	c.	Targeted reviews of market participants to confirm their level of cybersecurity resilience, including measures for protection of personal investor data, completed
	d.	Roundtable conducted with SRO's and industry representatives to develop opportunities for greater collaboration and improved communication on cybersecurity issues

Goal 5 -- Be an innovative, accountable and efficient organization

Support successful organization change and continuity

Market participants continue to face very challenging business conditions, including competition from new business models and technology enabled service offerings. Market participants expect the OSC to use its resources efficiently. That is why improving our efficiency is a top priority, and we remain committed to improving our business capabilities and the way we work.

We are introducing process improvements and increasing the use of technology to improve our operational performance. We are continuing to mature our research and data analysis capabilities to support improved and timely identification of risks, and a more disciplined approach to identifying issues and policy development. We are also continuing to incorporate technology and more sophisticated analytical tools to improve the efficiency, quality and timeliness of enforcement, and to gather and analyze data and other information, including information required for compliance and adjudicative matters. Management and staff will continue these efforts to make the OSC a more proactive and agile securities regulator.

The OSC operates in a global environment and needs to look for the best ways to deal with the evolution of markets and products, and support capital formation in Ontario. The OSC continues to view a cooperative regulator as the best approach to enhance investor protection, foster efficient rulemaking and promote globally competitive markets in Canada. This approach also provides greater capacity to identify and manage systemic risk and solidify Canada's international reputation for regulating its financial system. The OSC is committed to working with the participating jurisdictions to transition to the Cooperative Capital Markets Regulatory System. Throughout this process the OSC will remain focused on maintaining high standards of regulation and on keeping stakeholders informed and engaged. The OSC will also continue to work with the CSA to seek harmonized approaches to regulation as much as possible.

Priority Issue	Enhance OSC business capabilities and foster a dynamic, supportive and attractive workplace
Action Plan/Next Steps	a.	Continue to develop data collection, management and assessment practices
	b.	Continue to integrate economic analysis, research and data analysis within the OSC, and specifically in the policy development process
	c.	Improve regulatory capacity through the development of people and expertise; employees are provided with access to information, tools and resources to enable them to carry out their accountabilities effectively during organizational change and transition
Success Measures/ Expected Outcomes	a.	Use of research reflected consistently in OSC policy initiatives and OSC publications
	b.	Research and analysis of the adoption of new prospectus exemptions completed
	c.	Retention and turnover levels maintained within target ranges

2016 -- 2017 Financial outlook

The OSC is committed to operating on a cost recoverable basis. Our current budget projections for 2016-2017 are consistent with the direction set out when we published the OSC's fee rules (13-502 and 13-503), which became effective April 6, 2015. At that time the OSC advised that the impact of the fee rules would be relatively revenue neutral over the three-year period, with an expected surplus in 2015-2016, a smaller surplus in 2016-2017 and a deficit in 2017-2018. This is because revenues are expected to be relatively flat over the term of the rule, while expenses are expected to rise each year. The OSC is projecting to run a surplus as planned in 2015-2016. The proposed budget to be presented to the OSC Board for 2016-2017 will also be in line with the previously identified budget direction. A more detailed presentation of specific budget details will be included in the final Statement of Priorities once the Board has had a chance to review and approve the budget.