J.P. Morgan Securities Plc

Headnote

U.K. regulated firm exempted from dealer registration under paragraph 25(1) of the Act for provision of prime brokerage services -- relief limited to trades in Canadian securities for institutional permitted clients -- relief is subject to sunset clause.

Applicable Legislative Provisions

Statutes Cited

Securities Act, R.S.O. 1990, c. S.5, as am., ss. 25(1) and 74(1).

Instruments Cited

Multilateral Instrument 11-102 Passport System, s. 4.7(1).

National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, ss. 1.1, 8.5, 8.18, 8.21, Form 31-103F1 Calculation of Excess Working Capital.

National Instrument 81-102 Investment Funds, Part 6.

Ontario Securities Commission Rule 13-502 Fees.

December 7, 2023

IN THE MATTER OF THE SECURITIES LEGISLATION OF ONTARIO (the Jurisdiction) AND IN THE MATTER OF THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS AND IN THE MATTER OF J.P. MORGAN SECURITIES PLC (the Filer)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer (the Application) for a decision under the securities legislation of the Jurisdiction (the Legislation) exempting the Filer from the dealer registration requirement under subsection 25(1) of the Securities Act (Ontario) (the Act) in respect of Prime Services (as defined below) relating to Canadian securities (as defined below) that are provided in Canada to Institutional Permitted Clients (as defined below) (the Exemption Sought).

The principal regulator granted similar relief to the Filer in a decision dated May 15, 2018, subject to a five-year sunset clause (the Previous Decision). The Previous Decision expired on May 15, 2023 (the Termination Date).

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):

(a) the Ontario Securities Commission (OSC) is the principal regulator for this Application, and

(b) the Filer has provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in each of the other provinces of Canada in which the Filer relies on the exemption found in section 8.18 [International dealer] of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) other than the province of Alberta (the Passport Jurisdictions and together with the Jurisdiction, theJurisdictions).

Interpretation

Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.

For the purposes of this decision, the following terms have the following meanings:

"Canadian security" means a security that is not a foreign security;

"foreign security" has the meaning ascribed to that term in subsection 8.18(1) of NI 31-103;

"Institutional Permitted Client" shall mean a "permitted client" as defined in section 1.1 of NI 31-103, except for: (a) an individual, (b) a person or company acting on behalf of a managed account of an individual, (c) a person or company referred to in paragraph (p) of that definition unless that person or company qualifies as a permitted client under another paragraph of that definition, or (d) a person or company referred to in paragraph (q) of that definition unless that person or company has net assets of at least $100 million as shown on its most recently prepared financial statements or qualifies as a permitted client under another paragraph of that definition.

"Prime Services" means any of the following: (a) settlement, clearing and custody of trades, client cash and securities positions; (b) financing of long inventory; (c) lending and delivering securities on behalf of a client pursuant to a margin agreement to facilitate client short sales; (d) securities borrowing and/or lending pursuant to a securities lending agreement; (e) asset servicing, and (f) reporting of positions, margin and other balances and activity. For greater clarity, Prime Services do not include execution of trades in securities;

"Prime Services Clients" means an Institutional Permitted Client to whom the Filer provides Prime Services in the Jurisdictions in respect of Canadian securities in addition to foreign securities.

Representations

This decision is based on the following facts represented by the Filer:

1. The Filer is a public limited company registered in England and Wales having its registered office at 25 Bank Street, Canary Wharf, London, E14 5JP, United Kingdom (U.K.). The Filer is a wholly-owned subsidiary of JPMorgan Chase Bank, N.A., a U.S. national banking association, and an indirect wholly-owned subsidiary of JP Morgan Chase & Co., a Delaware corporation.

2. The Filer is authorized by the Prudential Regulation Authority in the U.K. (PRA) under the U.K. Financial Services and Markets Act 2000 (as amended, including those amendments introduced by the Financial Services Act 2012) to carry on a range of regulated activities within the U.K. and is subject to "dual regulation" by the Financial Conduct Authority in the U.K. (FCA) and the PRA. The Filer is currently licensed in the U.K. to deal with eligible counterparties, professional clients and retail clients with respect to its permitted activities. The Filer is currently authorized to carry on certain regulated activities in the U.K. in relation to certain specified investments, including the following: (a) dealing in investments as principal; (b) arranging (bringing about) deals in investments and making arrangements with a view to transactions in investments; and (c) safeguarding and administering investments. As is the case with all firms authorized in the U.K., the Filer's current U.K. regulatory status remains subject to variation and the possible imposition of regulatory limitations or requirements and is described as at the date of the Application.

3. The Filer is an Exempt Foreign Broker under U.S. Commodity Futures Trading Commission (CFTC) rules (17 CFR 30) and is able to conduct brokerage activities for U.S. customers on non-U.S. exchanges without having to register with the CFTC as a futures commission merchant. As a result, the Filer is a member of the National Futures Association in the U.S. (NFA) and is approved by the NFA as an exempt foreign firm under CFTC Regulation 30.10 under the U.S. Commodity Exchange Act.

4. The Filer is a member of major international securities and commodity futures exchanges and clearing houses, including but not limited to the London Stock Exchange, the London Metal Exchange, ICE Futures Europe, LCH Ltd. and ICE Clear Europe.

5. The "Prime Services" provided by the Filer to its Prime Services Clients principally consist of the following: (a) settlement, clearing and custody of trades; (b) financing of long inventory; (c) securities borrowing and/or lending pursuant to a securities lending agreement or delivering securities on behalf of a client pursuant to a margin agreement, in each case, to facilitate client short sales; and (d) reporting of positions, margin and other balances and activity. For greater clarity, Prime Services do not include execution of trades in securities.

6. The Filer offers Prime Services to Institutional Permitted Clients in respect of Canadian securities and foreign securities.

7. The Filer provides Prime Services in accordance with the Previous Decision.

8. The Filer has applied for the Exemption Sought in order to continue to provide the Prime Services in Canada in respect of Canadian securities to Institutional Permitted Clients after the Termination Date.

9. In the case of a Prime Services Client that is an investment fund subject to Part 6 of National Instrument 81-102 Investment Funds (NI 81-102), the custodianship requirements in Part 6 of NI 81-102 would apply and the Filer would provide Prime Services to an investment fund in compliance with the securities laws applicable to the investment fund, including Part 6 of NI 81-102 and, in the case of a Prime Services Client that is a registrant, the custody requirements set out in NI 31-103 would apply.

10. Prime Services Clients seek Prime Services from the Filer in order to separate the execution of a trade from the clearing, settlement, custody and financing of a trade. This allows the Prime Services Client to use many executing brokers, without maintaining an active, ongoing custody account with each executing broker. It also allows the Prime Services Client to consolidate settlement, clearing, custody and financing of securities in an account with the Filer.

11. The Filer's Prime Services Clients directly select their executing brokers. The Filer does not require its Prime Services Clients to use specific executing brokers through which Prime Services Clients must execute trades. Prime Services Clients send trade orders to the executing broker who carries out the trade. The executing broker will be an appropriately registered dealer or a person or company relying on an exemption from the dealer registration requirement that permits such executing broker to execute the trade for Prime Services Clients.

12. The Filer provides the Prime Services after the execution of the trade, but any commitment to provide financing or to lend or borrow securities in relation to a trade may be made prior to the execution of the trade. The executing broker will communicate the trade details to a Prime Services Client and the Filer or the Filer's clearing agent, as applicable. A Prime Services Client will also communicate the trade details to the Filer. For trades executed on a Canadian marketplace, the Filer will typically need to clear and settle the trades through a participant of the Canadian depository, clearing and settlement hub, CDS Clearing and Depository Services Inc.

13. The Filer exchanges money or securities and holds the money or securities in an account for each Prime Services Client. If the Filer is clearing and settling the trade through a clearing agent, the Filer's clearing agent exchanges money or securities and holds the money or securities in an omnibus account for the Filer, who in turn maintains a record of the position held for the Prime Services Client on its books and records.

14. On or following settlement, the Filer provides the other Prime Services as set out in paragraph 5.

15. The Filer enters into written agreements with each of its Prime Services Clients for the provision of Prime Services.

16. The Filer currently relies on the "international dealer exemption" under section 8.18 [International dealer] of NI 31-103 in the ten Canadian provinces to provide Prime Services in respect of foreign securities.

17. The Filer is not registered under the securities legislation of any of the jurisdictions of Canada, among other things is in the business of trading in securities, and, in the absence of the Exemption Sought, cannot provide the full range of Prime Services in the Jurisdictions in respect of Canadian securities without registration, except as permitted under section 8.5 [Trades through or to a registered dealer], under the exemptions found in paragraphs (a), (b) and (f) of subsection 8.18(2) [International dealer], or under section 8.21 [Specified debt] of NI 31-103.

18. The Filer is subject to regulatory capital requirements under the Capital Requirements Directive, which implements Basel III (U.K. Capital Requirements).

19. The U.K. Capital Requirements require that the Filer account for any guarantee of a debt of a third party through the credit risk element of its capital calculations. Broadly, the exposure value of a guarantee of a debt of a third party will be its accounting value remaining after certain adjustments are made as set out in the U.K. Capital Requirements. Where a guarantee is an off-balance sheet item, the U.K. Capital Requirements also specify how the exposure value of that guarantee is to be calculated.

20. The U.K. Capital Requirements are designed to provide protections that are substantially similar to the protections provided by the capital formula requirements and specifically risk adjusted capital to which dealer members of the Canadian Investment Regulatory Organization (CIRO) are subject. If the Filer's net capital declines below the minimum amount required, the Filer is required to notify the PRA under Rule 2.4 of the PRA's "General Notification Requirements" Rulebook chapter. The Filer's capital ratios exceed the minimum standards imposed by the U.K. Capital Requirements.

21. The Filer is required to prepare and submit capital adequacy, leverage and large exposures data to the PRA on a quarterly basis in compliance with the Common Reporting (COREP) framework. The COREP framework provides a more comprehensive description of the business activities of the Filer, and more accurately reflects those activities including client lending activity, than would be provided by Form 31-103F1 Calculation of Excess Working Capital (Form 31-103F1). The COREP reports cover the capital requirements and own funds reporting of a credit institution including, amongst other elements, capital adequacy, leverage, liquidity coverage, large exposures, stable funding and asset encumbrance. In contrast, the Form 31-103F1 is a calculation of excess working capital, which is a computation based primarily on the current assets and current liabilities on the books and records of the dealer. The Filer is up-to-date in its submissions of COREP reporting.

22. When carrying out the financing activities set out in the definition of Prime Services in paragraph 5, above, the Filer is subject to regulations of both the PRA and the FCA. These regulations are designed to provide protections that are substantially similar to the protections provided by the requirements regarding the lending of money, extension of credit and provision of margin to clients to which dealer members of CIRO are subject.

23. The Filer holds customer assets in accordance with the FCA's Client Assets Sourcebook (CASS Rules). CASS Rules require the Filer to segregate and keep segregated all custody assets of its clients from its proprietary assets. The requirement to maintain segregated securities is designed to ensure that the Filer has sufficient assets to cover all net equity claims of its customers and provide protections that are substantially similar to the protections provided by the requirements applicable to dealer members of CIRO. The Filer is in material compliance with the possession and control requirements of the CASS Rules.

24. The deposit insurance organization in the U.K. is the Financial Services Compensation Scheme, and the existing compensation limit on deposits is £85,000 per person per firm and on investments is £50,000 per person per firm, in both cases available to eligible claimants.

25. The Filer is not in default of any requirements of securities legislation in any jurisdiction in Canada, except with respect to the fact that the Previous Decision has lapsed and was not renewed on a timely basis. The Filer has at all times since the Previous Decision lapsed acted in full compliance with the terms and conditions set out in such relief, except for the five-year sunset clause.

26. The Filer submits that the Exemption Sought would not be prejudicial to the public interest because:

(a) The Filer is a regulated firm under the securities legislation of the U.K., and is subject to the requirements referred to in paragraphs 18 to 24;

(b) the availability of and access to Prime Services in respect of Canadian securities is important to Canadian institutional investors who are active participants in the international marketplace;

(c) the Filer will provide Prime Services in the Jurisdictions in respect of Canadian securities only to Institutional Permitted Clients; and

(d) the OSC has entered into a memorandum of understanding with the FCA regarding mutual assistance in the supervision and oversight of regulated entities that operate on a cross-border basis in the U.K. and Canada.

27. The Filer is a "market participant" as that term is defined under subsection 1(1) of the Act. As a market participant, among other requirements, the Filer is required to comply with the record keeping and provision of information provisions under section 19 of the Act, which include the requirement to keep such books, records and other documents as are necessary for the proper recording of business transactions and financial affairs, and the transactions executed on behalf of others, and to deliver such records to the OSC if required.

28. The Filer will not rely on subsection 4.7(1) of MI 11-102 to passport this decision into Alberta.

Decision

The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator to make the decision.

The decision of the principal regulator under the Legislation is that the Exemption Sought is granted so long as the Filer:

(a) has its head office or principal place of business in the U.K.;

(b) is authorised by the PRA and regulated by the PRA and the FCA in the U.K. and permitted to deal with eligible counterparties, professional and retail clients with respect to its permitted activities;

(c) engages in the business of clearing securities and exchange-traded derivatives in the U.K.;

(d) is subject to requirements over regulatory capital, lending of money, extension of credit and provision of margin, financial reporting to the PRA and/or the FCA, and segregation and custody of assets which provide protections that are substantially similar to the protections provided by the rules to which investment dealers that are dealer members of CIRO are subject (the Investment Dealer and Partially Consolidated Rules);

(e) limits its provision of Prime Services in the Jurisdictions in respect of Canadian securities to Institutional Permitted Clients;

(f) does not execute trades in Canadian securities with or for Prime Services Clients, except as permitted under applicable Canadian securities laws;

(g) does not require its Prime Services Clients to use specific executing brokers through which Prime Services Clients must execute trades;

(h) submits audited financial statements to the OSC on an annual basis, within 90 days of the Filer's financial year end;

(i) complies with the filing and fee payment requirements that would be applicable to the Filer if it were a registrant under OSC Rule 13-502 Fees, including, for clarity, participation fees based on its specified Ontario revenues attributable to capital markets activities conducted in reliance on the "international dealer exemption" under section 8.18 [International Dealer] of NI 31-103, if applicable, and capital markets activities conducted in reliance on the exemption in this Decision;

(j) files in an electronic and searchable format with the OSC such reports as to any or all of its trading activities in Canada as the OSC may, upon notice, require from time to time; and

(k) pays the increased compliance and case assessment costs of the principal regulator due to the Filer's location outside Ontario, including, as required, the reasonable cost of hiring a third party to perform a compliance review on behalf of the principal regulator.

This decision shall expire five years after the date hereof.

This decision may be amended by the OSC from time to time upon prior written notice to the Filer.

OSC File #: 2023/0462