Notice and Request for Comment - Application for Exemption from Recognition as an Exchange - 360 Treasury Systems AG MTF
A. Introduction
This notice requests comment on (i) the application filed by 360 Treasury Systems AG (the Applicant) under section 147 of the Securities Act (Ontario) (Act) for an exemption from the requirement to be recognized as an exchange contained in section 21 of the Act (Recognition Requirement); and (ii) the draft order exempting the Applicant from the Recognition Requirement.
The Applicant is a public limited company headquartered in Germany that operates a multilateral trading facility (MTF), which is principally regulated by the German Federal Financial Services Authority (BaFin). The MTF is a 'Request for Quote' (RFQ) trading system that facilitates transactions in foreign exchange (FX) derivatives instruments, including forwards, multiple forwards, swaps, options and non-deliverable forwards (NDFs).
The Applicant proposes to offer direct access in Ontario to its MTF to prospective participants in Ontario (Ontario Participants).
As the Applicant will be carrying on business in Ontario, it is required either to be recognized as an exchange under the Act or to apply for an exemption from the Recognition Requirement. The Applicant has applied for an exemption from the Recognition Requirement on the basis that it is already subject to regulatory oversight by BaFin.
B. Background
On January 3, 2018, the Markets in Financial Instruments Directive 2014/65/EU of the European Parliament and of the Council (MiFID II) was implemented. Under Article 28(1) of the Markets in Financial Instruments Regulation (Regulation (EU) No. 600/2014) (MiFIR), the regulation that accompanies MiFID II, certain European counterparties must trade certain derivatives on a trading venue and not bilaterally. As a result, Canadian banks and other institutions wishing to enter into transactions in these derivatives with EU counterparties must do so on a trading venue, namely a regulated market, an organised trading facility (OTF), an MTF or a third-country trading venue that the European Commission has determined has an equivalent system for regulating trading venues.
The Applicant has indicated that Canadian banks and other institutions wish to trade on its MTF.
MTFs provide a facility for bringing together orders from multiple buyers and sellers for types of over-the-counter (OTC) derivatives and other securities and use established non-discretionary methods under which the orders interact with each other. They meet the definition of "marketplace."
An MTF has a responsibility to regulate the conduct of its participants with respect to trading on the MTF and to set rules governing trading on the system. Because of these self-regulatory responsibilities, under the Act they would be considered an exchange.
C. Application and Draft Exemption Order
In the application, the Applicant has outlined how it meets the criteria for exemption from the Recognition Requirement. The specific criteria can be found in Appendix 1 of the draft exemption order. Subject to comments received, Staff intend to recommend that the Commission grant an exemption order with terms and conditions based on the draft exemption order. The application can be found on our website at www.osc.gov.on.ca and the draft exemption order is attached to this Notice.
D. Comment Process
The Commission is publishing for public comment the Applicant's application and the draft exemption order. We are seeking comment on all aspects of the application and draft exemption order.
Please provide your comments in writing, via e-mail, on or before May 14, 2019, to the attention of:
Ontario Securities Commission
20 Queen Street West, 22nd Floor
Toronto, Ontario M5H 3S8
Email: [email protected]
The confidentiality of submissions cannot be maintained as the comment letters and a summary of written comments received during the comment period will be published.
Questions may be referred to:
Keir Wilmut
Legal Counsel, Market Regulation
email: [email protected]
Alex Petro
Trading Specialist, Market Regulation
email: [email protected]
Jalil El Moussadek
Risk Specialist, Market Regulation
email: [email protected]
IN THE MATTER OF THE SECURITIES ACT, R.S.O. 1990, CHAPTER S. 5, AS AMENDED (THE ACT) AND IN THE MATTER OF 360 TREASURY SYSTEMS AG
ORDER (Section 147 of the Act)
WHEREAS 360 Treasury Systems AG (Applicant) has filed an application dated July 27, 2018 (Application) with the Ontario Securities Commission (Commission) requesting an order pursuant to section 147 of the Act exempting the Applicant from the requirement to be recognized as an exchange under subsection 21(1) of the Act (Exchange Relief);
AND WHEREAS the German Federal Financial Services Authority (BaFin) authorized the Applicant to act as the operator of a multilateral trading facility (MTF) under the German Securities Trading Act (Wertpapierhandelsgesetz) (WpHG) on January 11, 2017;
AND WHEREAS the Applicant has represented to the Commission that:
1.1 The Applicant is a stock corporation organized under the laws of the Federal Republic of Germany, and is wholly owned by its direct parent company, 360T Verwaltungs GmbH, and is indirectly wholly owned by its ultimate parent company, Deutsche Börse AG;
1.2 The Applicant is authorized by BaFin to act as the operator of a MTF for FX derivative instruments under WpHG;
1.3 The Applicant's MTF supports request-for-quote trading in FX derivative instruments;
1.4 Each member of the Applicant's MTF must qualify as an "eligible counterparty" or "professional client" under the Markets in Financial Instruments Directive 2014/65/EU (MiFID II) and the Markets in Financial Instruments Regulation (EU) No 600/2014 (MiFIR), both as amended;
1.5 An MTF is obliged under BaFin rules to have requirements governing the conduct of members, to monitor compliance with those requirements and to discipline its members, including by means other than exclusion from the Applicant's trading platform;
1.6 The Applicant monitors the trading activity conducted under its MTF's rules with a view to identifying breaches of such rules, disorderly trading and conduct that may amount to market abuse;
1.7 Because the Applicant regulates the conduct of its members, it is considered by the Commission to be an exchange;
1.8 Because the Applicant will have members located in Ontario, it will be considered by the Commission to be carrying on business as an exchange in Ontario and will be required to be recognized as such or exempted from recognition pursuant to section 21 of the Act;
1.9 The Applicant does not list or trade derivative instruments that are required to be cleared;
1.10 The Applicant has no physical presence in Ontario and does not otherwise carry on business in Ontario except as described herein; and
1.11 The Applicant satisfies all the Criteria for Exemption as described in Appendix 1 to Schedule "A";
AND WHEREAS the products traded on the Applicant's MTF are not commodity futures contracts as defined in the Commodity Futures Act (Ontario) and the Applicant is not considered to be carrying on business as a commodity futures exchange in Ontario;
AND WHEREAS the Commission will monitor developments in international and domestic capital markets and the Applicant's activities on an ongoing basis to determine whether it is appropriate for the Exchange Relief to continue to be granted subject to the terms and conditions set out in Schedule "A" to this order;
AND WHEREAS the Applicant has acknowledged to the Commission that the scope of the Exchange Relief and the terms and conditions imposed by the Commission set out in Schedule "A" to this order may change as a result of the Commission's monitoring of developments in international and domestic capital markets or the Applicant's activities, or as a result of any changes to the laws in Ontario affecting trading in derivatives or securities;
AND WHEREAS based on the Application, together with the representations made by and acknowledgements of the Applicant to the Commission, the Commission has determined that Applicant satisfies the criteria set out in Appendix 1 to Schedule "A" and that the granting of the Exchange Relief would not be prejudicial to the public interest;
IT IS HEREBY ORDERED by the Commission that, pursuant to section 147 of the Act, the Applicant is exempt from recognition as an exchange under subsection 21(1) of the Act,
PROVIDED THAT the Applicant complies with the terms and conditions contained in Schedule "A."
DATED , 2019.
____________________
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SCHEDULE "A"
TERMS AND CONDITIONS
Meeting Criteria for Exemption
1. 360 Treasury Systems AG ("360T") will continue to meet the criteria for exemption included in Appendix 1 to this Schedule.
Regulation and Oversight of 360T
2. 360T will maintain its registration as a multilateral trading facility ("MTF") with the German Federal Financial Services Authority ("BaFin") and will continue to be subject to the regulatory oversight of BaFin.
3. 360T will continue to comply with the ongoing requirements applicable to it as an MTF registered with BaFin.
4. 360T will promptly notify the Commission if its registration as an MTF has been revoked, suspended, or amended by BaFin, or the basis on which its registration as an MTF has been granted has significantly changed.
5. 360T must do everything within its control, which includes cooperating with the Commission as needed, to carry out its activities as an exchange exempted from recognition under subsection 21(1) of the Act in compliance with Ontario securities law.
Access
6. 360T will not provide direct access to a participant in Ontario ("Ontario User") unless the Ontario User is appropriately registered as applicable under Ontario securities laws or exempt from or not subject to those requirements, and qualifies an "eligible counterparty" or "professional client" under the Markets in Financial Instruments Directive 2014/65/EU (MiFID II) and the Markets in Financial Instruments Regulation (EU) No 600/2014 (MiFIR), both as amended.
7. For each Ontario User provided direct access to its MTF, 360T will require, as part of its application documentation or continued access to the MTF, the Ontario User to represent that it is appropriately registered as applicable under Ontario securities laws or is exempt from or not subject to those requirements.
8. 360T may reasonably rely on a written representation from the Ontario User that specifies either that it is appropriately registered as applicable under Ontario securities laws or is exempt from or not subject to those requirements, provided 360T notifies such Ontario User that this representation is deemed to be repeated each time it enters an order, request for quote or response to a request for quote or otherwise uses the MTF.
9. 360T will require Ontario Users to notify 360T if their registration as applicable under Ontario securities laws has been revoked, suspended, or amended by the Commission or if they are no longer exempt from or become subject to those requirements and, following notice from the Ontario User and subject to applicable laws, 360T will promptly restrict the Ontario User's access to 360T if the Ontario User is no longer appropriately registered or exempt from those requirements.
10. 360T must make available to Ontario Users appropriate training for each person who has access to trade on 360T's facilities.
Trading by Ontario Users
11. 360T will not provide access to an Ontario User to trading in products other than "swaps," as defined in section 1a(47) of the United States Commodity Exchange Act ("CEA") as amended (and for greater certainty, excluding security-based swaps), without prior Commission approval.
Submission to Jurisdiction and Agent for Service
12. With respect to a proceeding brought by the Commission arising out of, related to, concerning or in any other manner connected with the Commission's regulation and oversight of the activities of 360T in Ontario, 360T will submit to the non-exclusive jurisdiction of (i) the courts and administrative tribunals of Ontario and (ii) an administrative proceeding in Ontario.
13. 360T will file with the Commission a valid and binding appointment of an agent for service in Ontario upon whom the Commission may serve a notice, pleading, subpoena, summons or other process in any action, investigation or administrative, criminal, quasi-criminal, penal or other proceeding arising out of, related to, concerning or in any other manner connected with the Commission's regulation and oversight of 360T's activities in Ontario.
Disclosure
14. 360T will provide to its Ontario Users disclosure that states that:
(a) rights and remedies against 360T may only be governed by the laws of Germany, rather than the laws of Ontario and may be required to be pursued in Germany rather than in Ontario;
(b) the rules applicable to trading on 360T may be governed by the laws of Germany, rather than the laws of Ontario; and
(c) 360T is regulated by BaFin, rather than the Commission.
Prompt Reporting
15. 360T will notify staff of the Commission promptly of any of:
(a) any material change to its business or operations or the information provided in the Application, including, but not limited to material changes:
(i) to the regulatory oversight by BaFin;
(ii) the corporate governance structure of 360T;
(iii) the access model, including eligibility criteria, for Ontario Users;
(iv) systems and technology; and
(v) the clearing and settlement arrangements for 360T;
(b) any change in 360T regulations or the laws, rules and regulations in Germany relevant to the financial instruments available for trading on 360T's MTF where such change may materially affect its ability to meet the criteria set out in Appendix I to this Schedule;
(c) any condition or change in circumstances whereby 360T is unable or anticipates it will not be able to continue to meet any applicable requirements or regulations of BaFin;
(d) any known investigations of, or disciplinary action against, 360T by BaFin or any other regulatory authority to which it is subject;
(e) any matter known to 360T that may materially and adversely affect its financial or operational viability, including, but not limited to, any declaration of an emergency pursuant to 360T's rules;
(f) any default, insolvency, or bankruptcy of a participant known to 360T or its representatives that may have a material, adverse impact upon 360T; and
(g) any material systems outage, malfunction or delay.
16. 360T will promptly provide staff of the Commission with the following information to the extent it is required to provide to or file such information with BaFin:
(a) details of any material legal proceeding instituted against 360T;
(b) notification that 360T has instituted a petition for a judgment of bankruptcy or insolvency or similar relief, or to wind up or liquidate 360T or has a proceeding for any such petition instituted against it; and
(c) the appointment of a receiver or the making of any voluntary arrangement with creditors.
Quarterly Reporting
17. 360T will maintain the following updated information and submit such information in a manner and form acceptable to the Commission on a quarterly basis (within 30 days of the end of each calendar quarter), and at any time promptly upon the request of staff of the Commission:
(a) a current list of all Ontario Users and whether the Ontario User is registered under Ontario securities laws or is exempt from or not subject to registration, and, to the extent known by 360T, other persons or companies located in Ontario trading on the MTF as customers of participants (Other Ontario Participants);
(b) the legal entity identifier assigned to each Ontario User, and, to the extent known by 360T, to Other Ontario Participants in accordance with the standards set by the Global Legal Entity Identifier System;
(c) a list of all Ontario Users whom 360T has referred to BaFin, or, to the best of 360T's knowledge, whom have been disciplined by BaFin with respect to such Ontario Users' activities on the MTF and the aggregate number of all participants referred to BaFin in the last quarter by 360T;
(d) a list of all active investigations during the quarter by 360T relating to Ontario Users and the aggregate number of active investigations during the quarter relating to all participants undertaken by 360T;
(e) a list of all Ontario applicants for status as a participant who were denied such status or access to 360T during the quarter, together with the reasons for each such denial;
(f) a list of all additions, deletions, or changes to the products available for trading since the prior quarter;
(g) for each product,
(i) the total trading volume and value originating from Ontario Users, and, to the extent known by 360T, from Other Ontario Participants, presented on a per Ontario User or per Other Ontario Participant basis; and
(ii) the proportion of worldwide trading volume and value on 360T conducted by Ontario Users, and, to the extent known by 360T, by Other Ontario Participants, presented in the aggregate for such Ontario Users and Other Ontario Participants;
provided in the required format; and
(h) a list outlining each material incident of a security breach, systems failure, malfunction, or delay (including cyber security breaches, systems failures, malfunctions or delays reported under section 15(j) of this Schedule) that occurred at any time during the quarter for any system relating to trading activity, including trading, routing or data, specifically identifying the date, duration and reason, to the extent known or ascertainable by 360T, for the failure, malfunction or delay, and noting any corrective action taken.
Annual Reporting
18. 360T will file with the Commission any annual financial report or financial statements (audited or unaudited) of 360T provided to or filed with BaFin promptly after filing with BaFin.
Information Sharing
19. 360T will provide such information as may be requested from time to time by, and otherwise cooperate with, the Commission or its staff, subject to any applicable privacy or other laws (including solicitor-client privilege) governing the sharing of information and the protection of personal information.
APPENDIX 1
CRITERIA FOR EXEMPTION OF A FOREIGN EXCHANGE TRADING OTC DERIVATIVES FROM RECOGNITION AS AN EXCHANGE
PART 1 REGULATION OF THE EXCHANGE
1.1 Regulation of the Exchange
The exchange is regulated in an appropriate manner in another jurisdiction by a foreign regulator (Foreign Regulator).
1.2 Authority of the Foreign Regulator
The Foreign Regulator has the appropriate authority and procedures for oversight of the exchange. This includes regular, periodic oversight reviews of the exchange by the Foreign Regulator.
PART 2 GOVERNANCE
2.1 Governance
The governance structure and governance arrangements of the exchange ensure:
(a) effective oversight of the exchange,
(b) that business and regulatory decisions are in keeping with its public interest mandate,
(c) fair, meaningful and diverse representation on the board of directors (Board) and any committees of the Board, including:
(i) appropriate representation of independent directors, and
(ii) a proper balance among the interests of the different persons or companies using the services and facilities of the exchange,
(d) the exchange has policies and procedures to appropriately identify and manage conflicts of interest for all officers, directors and employees, and
(e) there are appropriate qualifications, remuneration, limitation of liability and indemnity provisions for directors, officers and employees of the exchange.
2.2 Fitness
The exchange has policies and procedures under which it will take reasonable steps, and has taken such reasonable steps, to ensure that each director and officer is a fit and proper person and past conduct of each officer or director affords reasonable grounds for belief that the officer or director will perform his or her duties with integrity.
PART 3 REGULATION OF PRODUCTS
3.1 Review and Approval of Products
The products traded on the exchange and any changes thereto are submitted to the Foreign Regulator, and are either approved by the Foreign Regulator or are subject to requirements established by the Foreign Regulator that must be met before implementation of a product or changes to a product.
3.2 Product Specifications
The terms and conditions of trading the products are in conformity with the usual commercial customs and practices for the trading of such products.
3.3 Risks Associated with Trading Products
The exchange maintains adequate provisions to measure, manage and mitigate the risks associated with trading products on the exchange that may include, but are not limited to, daily trading limits, price limits, position limits, and internal controls.
PART 4 ACCESS
4.1 Fair Access
(a) The exchange has established appropriate written standards for access to its services including requirements to ensure
(i) participants are appropriately registered as applicable under Ontario securities laws, or exempted from these requirements,
(ii) the competence, integrity and authority of systems users, and
(iii) systems users are adequately supervised.
(b) The access standards and the process for obtaining, limiting and denying access are fair, transparent and applied reasonably.
(c) The exchange does not unreasonably prohibit, condition or limit access by a person or company to services offered by it.
(d) The exchange does not
(i) permit unreasonable discrimination among participants, or
(ii) impose any burden on competition that is not reasonably necessary and appropriate.
(e) The exchange keeps records of each grant and each denial or limitation of access, including reasons for granting, denying or limiting access.
PART 5 REGULATION OF PARTICIPANTS ON THE EXCHANGE
5.1 Regulation
The exchange has the authority, resources, capabilities, systems and processes to allow it to perform its regulation functions, whether directly or indirectly through a regulation services provider, including setting requirements governing the conduct of its participants, monitoring their conduct, and appropriately disciplining them for violations of exchange requirements.
PART 6 RULEMAKING
6.1 Purpose of Rules
(a) The exchange has rules, policies and other similar instruments (Rules) that are designed to appropriately govern the operations and activities of participants and do not permit unreasonable discrimination among participants or impose any burden on competition that is not reasonably necessary or appropriate.
(b) The Rules are not contrary to the public interest and are designed to
(i) ensure compliance with applicable legislation,
(ii) prevent fraudulent and manipulative acts and practices,
(iii) promote just and equitable principles of trade,
(iv) foster co-operation and co-ordination with persons or companies engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in the products traded on the exchange,
(v) provide a framework for disciplinary and enforcement actions, and
(vi) ensure a fair and orderly market.
PART 7 DUE PROCESS
7.1 Due Process
For any decision made by the exchange that affects a participant, or an applicant to be a participant, including a decision in relation to access, exemptions, or discipline, the exchange ensures that:
(a) parties are given an opportunity to be heard or make representations, and
(b) it keeps a record of, gives reasons for, and provides for appeals or reviews of its decisions.
PART 8 CLEARING AND SETTLEMENT
8.1 Clearing Arrangements
The exchange has or requires its participants to have appropriate arrangements for the clearing and settlement of transactions for which clearing is mandatory through a clearing house.{1}
8.2 Risk Management of Clearing House
The exchange has assured itself that the clearing house has established appropriate risk management policies and procedures, contingency plans, default procedures and internal controls.
PART 9 SYSTEMS AND TECHNOLOGY
9.1 Systems and Technology
Each of the exchange's critical systems has appropriate internal controls to ensure completeness, accuracy, integrity and security of information, and, in addition, has sufficient capacity and business continuity plans to enable the exchange to properly carry on its business. Critical systems are those that support the following functions:
(a) order entry,
(b) order routing,
(c) execution,
(d) trade reporting,
(e) trade comparison,
(f) data feeds,
(g) market surveillance,
(h) trade clearing, and
(i) financial reporting.
9.2 System Capability/Scalability
Without limiting the generality of section 9.1, for each of its systems supporting order entry, order routing, execution, data feeds, trade reporting and trade comparison, the exchange:
(a) makes reasonable current and future capacity estimates;
(b) conducts capacity stress tests to determine the ability of those systems to process transactions in an accurate, timely and efficient manner;
(c) reviews the vulnerability of those systems and data centre computer operations to internal and external threats, including physical hazards and natural disasters;
(d) ensures that safeguards that protect a system against unauthorized access, internal failures, human errors, attacks and natural catastrophes that might cause improper disclosures, modification, destruction or denial of service are subject to an independent and ongoing audit which should include the physical environment, system capacity, operating system testing, documentation, internal controls and contingency plans;
(e) ensures that the configuration of the system has been reviewed to identify potential points of failure, lack of back-up and redundant capabilities;
(f) maintains reasonable procedures to review and keep current the development and testing methodology of those systems; and
(g) maintains reasonable back-up, contingency and business continuity plans, disaster recovery plans and internal controls.
9.3 Information Technology Risk Management Procedures
The exchange has appropriate risk management procedures in place including those that handle trading errors, trading halts and respond to market disruptions and disorderly trading.
PART 10 FINANCIAL VIABILITY
10.1 Financial Viability
The exchange has sufficient financial resources for the proper performance of its functions and to meet its responsibilities.
PART 11 TRADING PRACTICES
11.1 Trading Practices
Trading practices are fair, properly supervised and not contrary to the public interest.
11.2 Orders
Rules pertaining to order size and limits are fair and equitable to all market participants and the system for accepting and distinguishing between and executing different types of orders is fair, equitable and transparent.
11.3 Transparency
The exchange has adequate arrangements to record and publish accurate and timely information as required by applicable law or the Foreign Regulator. This information is also provided to all participants on an equitable basis.
PART 12 COMPLIANCE, SURVEILLANCE AND ENFORCEMENT
12.1 Jurisdiction
The exchange or the Foreign Regulator has the jurisdiction to perform member and market regulation, including the ability to set rules, conduct compliance reviews and perform surveillance and enforcement.
12.2 Member and Market Regulation
The exchange or the Foreign Regulator maintains appropriate systems, resources and procedures for evaluating compliance with exchange and legislative requirements and for disciplining participants.
12.3 Availability of Information to Regulators
The exchange has mechanisms in place to ensure that the information necessary to conduct adequate surveillance of the system for supervisory or enforcement purposes is available to the relevant regulatory authorities, including the Commission, on a timely basis.
PART 13 RECORD KEEPING
13.1 Record Keeping
The exchange has and maintains adequate systems in place for the keeping of books and records, including, but not limited to, those concerning the operations of the exchange, audit trail information on all trades, and compliance with, and/or violations of exchange requirements.
PART 14 OUTSOURCING
14.1 Outsourcing
Where the exchange has outsourced any of its key services or systems to a service provider, it has appropriate and formal arrangements and processes in place that permit it to meet its obligations and that are in accordance with industry best practices.
PART 15 FEES
15.1 Fees
(a) All fees imposed by the exchange are reasonable and equitably allocated and do not have the effect of creating an unreasonable condition or limit on access by participants to the services offered by the exchange.
(b) The process for setting fees is fair and appropriate, and the fee model is transparent.
PART 16 INFORMATION SHARING AND OVERSIGHT ARRANGEMENTS
16.1 Information Sharing and Regulatory Cooperation
The exchange has mechanisms in place to enable it to share information and otherwise co-operate with the Commission, self-regulatory organizations, other exchanges, clearing agencies, investor protection funds, and other appropriate regulatory bodies.
16.2 Oversight Arrangements
Satisfactory information sharing and oversight agreements exist between the Commission and the Foreign Regulator.
PART 17 IOSCO PRINCIPLES
17.1 IOSCO Principles
To the extent it is consistent with the laws of the foreign jurisdiction, the exchange adheres to the standards of the International Organisation of Securities Commissions (IOSCO) including those set out in the "Principles for the Regulation and Supervision of Commodity Derivatives Markets" (2011).
{1} For the purposes of these criteria, "clearing house" also means a "clearing agency".