Explore how investment dealers act as pivotal financial intermediaries, facilitating the issuance and trading of securities, underwriting, and market-making within Canadian capital markets.
Investment dealers form the backbone of Canada’s capital markets by connecting investors—those who supply capital—with issuers—those who need capital for business growth, infrastructure, and other financial activities. Acting as intermediaries, they perform functions that drive efficiency, stability, and liquidity in both the primary and secondary markets. This chapter explores how investment dealers facilitate the movement of capital, the services they offer, and the regulatory framework within which they operate.
At its core, financial intermediation is the process of channeling funds from those who have surplus capital (investors) to those who need capital (issuers such as corporations or governments). Investment dealers fulfill this role by:
• Assessing the creditworthiness and potential returns of issuers.
• Structuring financial products (e.g., bonds, equities, derivatives).
• Bringing these products to market where investors can purchase them.
By doing so, investment dealers ensure that capital is allocated efficiently, helping businesses expand, governments finance public projects, and investors tap into wealth-growing opportunities.
Financial intermediation creates value for both sides of the transaction. Investors gain access to a wider range of opportunities and products, while issuers can obtain the funding necessary to bring projects to life. Through this process, capital markets become more liquid, stable, and transparent.
Below is a simple diagram demonstrating the flow of capital between investors, investment dealers, and issuers:
flowchart LR
A[Investors] -->|Provide Capital| B[Investment Dealer]
B[Investment Dealer] -->|Funds via Securities| C[Issuers]
C[Issuers] -->|Equity, Bonds, etc.| B
B -->|Distribute Proceeds/Returns to Investors| A
In the diagram, investment dealers stand in the middle, facilitating the exchange of funds and securities.
When newly issued securities (such as shares, bonds, or structured products) enter the marketplace, this is known as the primary market. Investment dealers play a key role here:
Underwriting Commitments
• Underwriters assume the risk of selling newly issued securities.
• By purchasing the entire new issue (or a portion, in a syndicate), they guarantee a certain amount of capital to the issuer.
Pricing the Offering
• Dealers carefully analyze market conditions, comparable issues, and investor demand to determine an appropriate offering price.
Regulatory Compliance
• During underwriting, investment dealers must ensure that the sale of securities complies with provincial and federal regulations.
• They help issuers prepare necessary documents, such as prospectuses filed on SEDAR+ (the central database for Canadian securities filings transitioning from SEDAR).
When a major Canadian bank issues a new tranche of bonds, an investment dealer (or a group of dealers) will:
• Evaluate market interest rates and credit spreads.
• Help the bank structure the bond (e.g., five-year maturity, semi-annual coupon).
• Purchase the entire issue to sell to institutional and retail investors across Canada.
This process ensures the bank raises the required capital for its lending operations or other financing needs, while investors acquire bonds that pay regular interest over a set term.
After securities are issued, they trade among investors in the secondary market. Investment dealers fulfill a critical role here as market-makers, continuously quoting prices at which they are willing to buy (bid) or sell (ask) certain securities.
• Liquidity: By holding an inventory of securities and continuously offering bid/ask prices, market-makers enable ready buying and selling.
• Efficient Price Discovery: With multiple dealers quoting prices, the market converges on fair values for securities.
• Reduced Volatility: The presence of multiple market-makers can dampen large swings in prices by absorbing temporary imbalances in supply and demand.
Consider a scenario where a Canadian pension fund wishes to sell $50 million worth of a corporate bond to rebalance its portfolio. An investment dealer acting as a market-maker stands ready to purchase some or all of these bonds from the pension fund (the seller) and, if needed, offer them to other clients or hold them in its inventory. This posture effectively guarantees that transactions can occur, even if there is no immediate direct buyer.
Beyond the buying and selling of securities, investment dealers offer a wide range of services:
Retail Brokerage and Advice
• Provide financial advice to individual investors regarding equity, fixed-income, and derivative investments.
• Offer research reports, asset allocation strategies, and wealth management services.
Institutional Sales and Trading
• Cater to pension funds, mutual funds, and hedge funds by executing large orders and facilitating block trades.
• Offer proprietary research and access to specialized products.
Corporate Finance and Merger & Acquisition (M&A) Advisory
• Advise firms on raising capital through equity or debt.
• Guide corporations through mergers, acquisitions, or divestitures, offering valuation and structuring expertise.
Compliance and Risk Management Consultations
• Assist clients in navigating regulations such as NI 31-103.
• Evaluate risk parameters for potential transactions and products.
Investment dealers in Canada are subject to a robust regulatory framework designed to uphold investor protection, market integrity, and financial stability. Key regulatory bodies include:
• Canadian Investment Regulatory Organization (CIRO):
Formerly IIROC, CIRO oversees Canadian investment dealers, setting capital requirements, conduct standards, and enforcing rules.
• Provincial Securities Commissions:
Each province and territory has its own commission (e.g., Ontario Securities Commission, Alberta Securities Commission) that enforces securities laws and coordinates through the umbrella of the Canadian Securities Administrators (CSA).
• National Instrument 31-103:
This instrument outlines registration requirements and ongoing compliance obligations for dealers, including suitability obligations, know-your-client (KYC) processes, and continuous risk monitoring.
Investment dealers must maintain adequate capital, measured against the type and scale of their operations, to absorb unforeseen market shocks. They are also bound by conduct rules that prioritize client interests, safeguard confidentiality, and ensure transparent disclosures around fees and potential conflicts of interest.
RBC Dominion Securities, a Royal Bank of Canada subsidiary, might underwrite the initial public offering (IPO) of a technology startup. RBC Dominion Securities’ role includes:
• Drafting the prospectus and filing with the relevant securities commission.
• Determining share price in collaboration with the issuer.
• Assuming the risk of distributing the shares (i.e., buying them from the issuer).
• Guiding the technology company’s management team in marketing the offering to investors.
TD Securities might advise on a merger between two mid-sized manufacturing firms in Ontario. Here, TD Securities would:
• Perform a valuation of both firms.
• Suggest the optimal capital structure (equity vs. debt financing).
• Coordinate with legal advisors to ensure compliance with securities regulations.
• Assist in the ultimate share exchange transaction and manage stakeholder relations.
• Pitfall: Inadequate risk management by an investment dealer, leading to potential insolvency during market volatility.
• Best Practice: Maintaining robust capital buffers and conducting stress tests under various market scenarios.
• Pitfall: Conflicts of interest when dealers have proprietary trading positions.
• Best Practice: Establish clear ethical walls (sometimes called “Chinese walls”) between advisory, research, and sales or trading divisions.
• Pitfall: Neglecting compliance obligations under National Instrument 31-103.
• Best Practice: Regular training for client-facing staff and compliance audits to ensure registration requirements and conduct rules are consistently met.
Understanding these roles, responsibilities, and the regulatory environment is essential for those involved in Canada’s investment sector, whether as aspiring professionals or informed investors.
• Underwriting: The process where an investment dealer assumes the risk of distributing a new issue of securities to the public by purchasing them from the issuer.
• Market-Making: An activity where dealers quote both bid (buy) and ask (sell) prices for securities, maintaining a continuous market for those securities.
• Primary Market: The marketplace where newly issued securities, such as IPO shares, are first sold to investors.
• Secondary Market: The marketplace where existing securities are bought and sold among investors after the initial issue.
• Dealer Inventory: A collection of securities that dealers hold in their own accounts for trading and market-making purposes.
CSC® Vol.1 Mastery: Hardest Mock Exams & Solutions
• Dive into 6 full-length mock exams—1,500 questions in total—expertly matching the scope of CSC Exam 1.
• Experience scenario-driven case questions and in-depth solutions, surpassing standard references.
• Build confidence with step-by-step explanations designed to sharpen exam-day strategies.
CSC® Vol.2 Mastery: Hardest Mock Exams & Solutions
• Tackle 1,500 advanced questions spread across 6 rigorous mock exams (250 questions each).
• Gain real-world insight with practical tips and detailed rationales that clarify tricky concepts.
• Stay aligned with CIRO guidelines and CSI’s exam structure—this is a resource intentionally more challenging than the real exam to bolster your preparedness.
Note: While these courses are specifically crafted to align with the CSC® exams outlines, they are independently developed and not endorsed by CSI or CIRO.